Sunday, April 27, 2008

Talent Management Revisited

We need a new way of thinking about the challenge of talent management. The first step is to be clear about the goal. Talent management is not an end in itself. It is not about developing employees or creating succession plans. Nor is it about achieving specific benchmarks such as limiting turnover to 5 percent, having the most educated workforce, or gaining any other tactical outcome. Rather, the goal of talent management is the more general and important task of helping the organization achieve its overall objectives. In the business world, that objective is to make money. And making money requires that you understand the costs as well as the benefits associated with your talent management choices.
Helping the organization achieve its goals begins with recognizing that the most important problem faced by virtually all employers is the need to respond quickly to changes in competitive environments. Employers now change strategies, structures, and operations quickly and repeatedly in response to customer demands, competitor innovations, regulatory changes, and other outside factors. The developments driving these responses are difficult to predict, and mistakes in responding – waiting too long to change or planning for circumstances that fail to pan out – are costly.
In this context, the fundamental problem for organizations is to manage risk, which we can think of as the costs associated with events that are uncertain or at least difficult to predict. Business risk, driven especially by uncertainty about business demands, translates directly into risk for talent management. The greatest risks in talent management are, first, the costs of a mismatch in employees and skills (not enough to meet business demands or too much, leading to layoffs) and, second, the costs of losing your talent development investments through the failure to retain employees. These risks stand in the way of the ability of your organization to meet its goals.
The new way of thinking about talent management is neither the bureaucratic models of planning from the 1950s nor the free agency model of the 1980s and 1990s, both of which were rooted in unique and transient circumstances. This new approach represents a balancing of interests – between internal development and outside hiring, between the interests of employees and those of the organization. Fundamental to this new model is acknowledging the uncertainty that appears to be a permanent part of the business world and being able to respond and adapt to it. That acknowledgment means that you cannot rely on the assumption that drove the old models of workforce planning and talent management – the assumption that you can forecast away the uncertainty and plan years or decades into the future.
Fortunately, you do not have to invent a set of new practices for responding to uncertainty and risk. Many of the challenges in contemporary talent management are analogous to problems already analyzed in the field of operations research. For example, the issues in managing an internal talent pipeline – the ways employees advance through development jobs and experiences – are remarkably similar to those involved in moving products through a supply chain. In both cases, the significant challenges are to reduce bottlenecks that block advancement, to speed processing time, and to improve forecasts of need and thereby avoid mismatches. Other techniques from economics allow you to better manage the return on your investments in development, especially in an environment where employees have a market for their skills and your key concern becomes retention.
One of the great conundrums in business is that even though executives acknowledge the importance of employees in theory – “people are our most important asset, and we really mean that” – in practice they often disparage, or at least ignore, the management of people. It has been difficult for them to see how most human resource practices relate to the issues on which they focus: the business strategy challenges that define the direction of organizations and the ways they compete. Traditionally, internal talent development practices have been so long-term in their orientation that they are disconnected from the immediacy of contemporary business strategy decisions; the outside hiring model is reactive (after problems occur), becoming an execution issue that often disappoints not only because of its costs but also because it lags the need for talent.
This new way of thinking about talent management connects it directly to business decisions. In virtually every organization, people are the biggest component of costs and the source of the most important competencies, so it is crucial to adopt approaches to manage the risks associated with talent issues in helping your organization manage overall business risk. The ability to get the right people with the right skills into the right jobs in a cost-effective way makes it possible for an organization to adjust and respond in the strategy arena.
This approach to talent is strategic in the two most important uses of that term in business: it involves choices or strategies about managing human capital that must be made based on each organization’s needs, and those choices also relate directly to business strategy. If done correctly, talent management feeds into the process of strategy formation by outlining the possibilities for those who are making business decisions.
The Current State of Talent Management
A recent survey reported that roughly two-thirds of U.S. employers do no planning for their talent needs. For such organizations, every new need for talent presents a serious disruption. Every employee who quits represents a calamity, and every new demand for skills represents a crisis. A company that does no planning – does not manage its talent – basically waits for a need to develop or current employees to leave and then hunts for a solution.
A good illustration of the consequences of not managing talent is the apparent panic under way in many parts of the business community at the idea that the baby boom generation will begin to retire soon and its skills, knowledge, and competencies will be lost. Surely nothing was more predictable than the fact that a generation of individuals is growing older and will eventually stop working. Employees had been retiring from companies for generations without causing as much as a ripple in corporate planning. The reason for the panic now is that many organizations have just begun to realize that they have no arrangements for replacing these retiring workers, because outside hiring does not work for company-specific and legacy skills of the kind many of these older workers possess.
The only good news is that most employers are essentially facing the talent management challenge with a clean slate: they have little idea how to address the challenge. Unfortunately, the advice they are getting is to return to the practices of the 1950s. Foremost among these practices are long-term succession plans, which attempt to identify which individuals will move into what jobs, mapping out careers years into the future.
That approach is a mistake. The practices of the 1950s, including detailed talent pipelines and succession plans, no longer work because the business environment to which they were tailored no longer exists. The older models were based on the assumption that one could plan the future of an organization years or even decades in advance with reasonable certainty. Its human capital requirements could then be predicted with some certainty. A second crucial assumption was that a company’s internal pipelines of talent, through which individuals advanced in roles and responsibilities, did not leak and that the supply of talent being developed would be available when it was needed. The title of William H. Whyte’s classic book The Organization Man reflected the historically distinctive relationship between these candidates and their employers. They were tied to the organization over a lifetime in a way previously associated only with military or religious service.
Developing talent internally was an imperative in this earlier period because there was no alternative. Competitors used the same internal development approach, rewarding success with promotions and pay increases. Even if another employer wanted to hire talent from the outside, only those candidates who were failing to advance in their current organizations were interested in changing employers. This was a classic adverse selection problem, as they had to start in other companies at a much lower level. Because the failure to develop talent meant not having the players needed to run the organization, the costs of internal development were largely irrelevant, although internal accounting systems were so poor that it would have been difficult to assess the true costs of arrangements as complicated as developing employees in any case. Development practices, such as rotational job assignments, were so deeply embedded in the operating models of business that their costs were rarely questioned.
The current environment for talent management is fundamentally different because the two basic assumptions that underpinned the Organization Man model no longer hold. First, product markets are no longer predictable. The rise of deregulation of product markets in the late 1970s, increases in foreign competition in the 1980s, and changes in consumer tastes mean that it is now much more difficult to predict what will sell or, in the not-for-profit world, what constituents will demand. Customer demands change much more rapidly as new products from a larger group of competitors come onstream more quickly. The idea that a company can predict accurately what it will be making ten years from now – something that was common in industries as diverse as telecommunications, transportation, consumer goods, and financial services until the 1970s – has disappeared. The demand for talent follows directly from business and operating demands. So as business forecasts and plans have shrunk from ten years to five years to, in most cases, one year, the ability to predict the talent those plans demand also must be scaled back. Years-long programs for developing talent create a false sense of accuracy and no longer make sense.
Second, the supply of internal talent is no longer easily predictable. The period of managerial layoffs beginning in the early 1980s made jobs insecure from the employee’s perspective, but from an individual employer’s perspective, the internal supply of talent was still reasonably predictable until labor markets tightened in the 1990s. Then more companies began outside hiring, and one employer’s outside candidate became another’s retention challenge. Talent pipelines hemorrhaged as employees embraced the overtures of executive search firms and other employers. It became difficult to predict what percentage of candidates who began a development program would remain when it ended. A company that has a 10 percent turnover rate among its managerial ranks – not an unusual level – will lose half the candidates in its management pipeline within five years. Does it still make sense to call that arrangement a pipeline, or is it better thought of as a sieve? Some number of employees will make it through to the end, but it is not clear exactly how many will drop out and when they will do so.
As if these two complications were not enough, another important change has occurred: pressure exists to show that there is a financial return associated with every set of practices. Internal accounting systems have gotten better at estimating costs, and the arrangements associated with earlier models of talent management, such as maintaining jobs for developmental purposes, proved to be costly following the reengineering trend. There is no trick to developing talent if you don’t care how much money it costs. Because outside hiring provides an alternative to internal development, the latter must demonstrate its value just as does every other practice and form of investment.
At this point, if you’re a thoughtful executive you throw up your hands: developing employees is too expensive and uncertain, and outside hiring has also become expensive and cannot meet unique organizational needs. What can you do? That is why you need to approach the problem in a different way.
As noted earlier, talent management should be about helping a business make money, finding the most cost-effective ways of meeting the organization’s needs for talent. And the big challenge is uncertainty. The type of talent management that makes sense in this economic context does not pretend that it can eliminate uncertainty through better forecasting and planning. Talent forecasting cannot be any more accurate than the business forecasts on which it is based, and the latter are not very accurate. Because every plan involves commitments and commitments come with costs, long-term plans end up being expensive because they are often wrong. Rather than pretend to eliminate uncertainty, the better approach is to find ways to manage it.

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