Understanding the Changing Economics of the Talent Marketplace
Republished with permission from the VP-of-HR Newsletter published by Dr. John Sullivan
The mere use of the word "economics" in an article's title can quickly doom it to obscurity, but rather than having a fear of economics HR professionals need to realize that a working knowledge of it can actually help them understand the constantly changing forces that impact their firm's business model and workforces. In fact, research by the University of Michigan has shown that external business knowledge is the key differentiator between average and successful HR professionals. Fortunately, you don't have to be a Ph. D to understand the forces that are changing competition, the pace at which business operates, or the supply and demand issues for talent that every firm needs in order to thrive. In my experience, a complete understanding of "what is happening" and "why" in the external environment is critical in preparing HR professionals to respond more effectively to the changing needs of the business and to plan for future opportunities.
As a professor in a large business school, I have spent years explaining economic environmental factors in easy to understand terms. My goal via this article is to help you and your managers understand the economic issues that are making it more difficult to find, manage and retain the talent you need to thrive in this highly competitive world.
CHANGES IN THE BUSINESS WORLD THAT IMPACT TALENT NEEDS
There have been several changes in the business environment in the last few years that fundamentally altered the way in which firms compete. In fact, what has happened is that "change" itself has changed. Today the business environment is changing faster and more frequently than ever before in the history of mankind! Some of these key economic changes include:
Global Competition from Developing Countries
A quick visit to any large department store will reveal that most if not all products being sold now originate from companies operating in what would have previously been considered "developing" countries. Not only can products originate in such zones, so too can professional services such as accounting and legal document preparation. If you have read the bestselling book "The World Is Flat" you already know that there are a variety of economic and technological changes that have essentially "torn down" previously insurmountable competitive advantages that certain countries held for decades. Those economic competitive advantages which once included having a central "location", abundant natural resources or a history of industrial development no longer provide the strong business advantages they once did.
Instead, the widespread availability of cheap communications, the proliferation of the Internet, as well as abundant cheap transportation has changed the competitive landscape. It is now possible for companies located in remote countries with few natural resources or geographic advantages to emerge as serious global competitors. Countries that were formerly labeled as "underdeveloped" like India, Vietnam and China now compete on a relatively equal basis with long established industrial countries. A prime example being Nokia, located in Finland, being able to dominate the mobile phone industry with no natural resource or location advantage. While product brands still have an impact, customers and businesses alike are shifting their focus toward features and price compared to location of manufacture and manufacturer, as more previously "unheard of" firms produce low cost, reliable products with exciting new features. If you have considered purchasing a new television, you can see this with a variety of competitive products being offered by firms you have never heard of. As consumers gain experience in successfully buying quality products and services from "unknown" firms operating in unknown locations, "locally made" and well branded will fade as major buying points.
The visible impacts of these changes are a level of intense global competition from countries, firms and labor forces that were considered to be minor players only a decade ago. Firms must now learn to identify new competitors rapidly if they are to avoid being blindsided in the marketplace. Cheap communications, transportation and the Internet will also allow a significant portion of all work to be done anywhere (i.e. in low cost labor locations). Thus, it will be difficult for firms located in countries with high costs of living or strong labor unions to compete with these low labor cost countries. Even with outsource and offshore options, firms in industrialized countries will need to compete based primarily of their labor quality, as well as their innovativeness and their speed to market.
As Industry Boundaries Blur, Agility Becomes Essential
In the past it was easy to identify your competition because they had either been producing similar products within the clear boundaries of "your" industry for sometime or had to acquire resources to get started that were easy to spot. However, with advances in design, manufacturing, and technology, firms will now be able to produce an extremely wide range of products and services with virtually no lead or configuration time needed. The changing landscape means that your firm will have to compete against products and services from anywhere and anyone. Apple's entry into both the music and telecommunications industry are excellent examples of how competition can come from previously unrelated industries.
The best firms will need to be prepared for a continuous and sometimes sudden onslaught of product and service "surprises" and competition from previously unknown firms outside your industry. This means that firms must be agile and have a labor force capable of quickly adapting to and competing with surprise products and services produced by other firms.
Rapid Copying Forces You To Continually Innovate And Learn.
Extensive global travel and continuous benchmarking by global consulting firms now assures rapid copying of products, services, and even your best business (HR) practices. New ideas are now talked about extensively on the internet, so there are few corporate secrets. As a result, any successful product or business process that you might develop will be copied rapidly around the world within months. Recently released movies and music for example are copied almost immediately and are often available for free on the Internet within hours of their release if not before. The profound availability of information also means that established "answers" to problems and reliable best practices that once provided competitive advantage now can become obsolete relatively quickly.
The end result of rapid copying is that firm's must now innovate, not once every few years but continually, in order to stay ahead of their competitors, which is much harder to maintain. Continuous innovation requires targeted processes to hire, develop and retain innovators as well as processes to encourage and drive forward innovative ideas. As answers become obsolete quickly, the relative value of experience and education will decrease and the key competency will become rapid continuous learning on the part of every employee.< /p>
Customer Expectations Require Speed
The rapid spread of information sharing about products, allows potential customers around the world to almost instantly find out what's hot. This free flow of information drives demand, and as a result, there will be constant pressure to continually add new product and service features. In economic terms, this means that "first entry" firms (i.e. firms that have the shortest time to market with new products or features) will garner the high margin and high profits associated with first entry to the market.
The push to get there first will require that managers shift their focus away from merely being efficient and towards being fast. Unfortunately, finding workers that can operate in an extremely fast environment is harder to do and managing those accustomed to speed requires HR and decision making processes to be dramatically revised.
18 Ways That Talent Management Is Changing to Remain Relevant
The many changes occurring in the business environment can't be ignored by HR managers, because imply necessary changes in how organizations acquire and manage talent. Some firms like Google and Microsoft have already begun to make the transition toward a new Talent Management model, while others are woefully behind. If you want to plan ahead, here are the 18 most important changes in talent management.
1. There will be global and cross-industry competition for top talent--As firms expand globally, they must now compete for talent in many countries where their product and employment brands may not be very strong. Talent Management systems that were designed for your primary market will not always work in other cultures. Talent markets will in most cases, shift from local to global and as a result, new recruiting and retention capabilities will have to be developed to allow firms to compete for the best talent in these new markets.
2. Knowledge replaces muscle--In a "knowledge economy" the value of physical labor will wane and the percentage of knowledge workers will increase overtime. Talent Management systems must shift, so that they now emphasize and prioritize the management of knowledge workers which are relatively scarce, so recruiting processes must shift to ensure that the best can be attracted and retained.
3. Innovators are needed--Because first entry provides high margins, Talent Management systems must shift dramatically, so that they target the hiring of innovators that are required to get there “first”. Because innovators are often “different,” the processes used to manage them must also become more “tolerant” of how they work. Reward systems must measure and reward successful innovation and retention processes must focus on retaining them.
4. Team work replaces individual contributors –Even though great ideas can come from individuals, the chance that these ideas will be successfully implemented quickly is small without the support of cross-functional teams. Teams are also more effective at identifying and solving complex problems. As a result, it becomes essential to focus on hiring, retaining and developing individuals (including innovators) with strong team skills.
5. Technology requires a much different type of talent--Firm’s can’t be global or fast without relying heavily on technology. As the amount of technology usage increases, so must the percentage of technologists in the organization. The growing reliance on technology has put technology and knowledge workers in high demand, which has increased their relative power to negotiate special treatment. This means more training, a looser management style, fewer rules and more remote work options (Google, Best Buy and WL Gore are benchmark firms to study). In addition, when you do a lot of tech hiring, you take on new recruiting competitors like Google which become part of your “talent competitors” even though they may not be a product competitor. Unfortunately, systems designed to recruit and retain most tech workers will not be effective against competition like Google.
6. Speed requires a different type of management approach--Because firms must be fast and responsive to sudden market changes, talent managers must focus on recruiting and managing employees that are adaptable and that can move fast. But “fast workers” are scarcer and harder to manage than average workers. This means that recruiting and decision making processes must be updated so that they don’t frustrate such workers. Retention efforts must also focus on retaining these agile employees and “slower” workers must be moved out, so that they don’t hinder the innovation process.
7. Managers must become “influencers” – In the past managers “ordered” those under their control “what to do” and “how to act”. As the power shits and knowledge and technology workers have more opportunities to leave, managers must learn to treat these critical workers more like volunteers. Influencing replaces “ordering” in many cases. The increased use of cross function teams also means that managers must influence and manage many people that do not even report to them. This shift in skill requirements makes fewer want to accept the role, thus increasing the demand for these "influencing" managers (Google and WL Gore are leaders in this area).
8. Employee loyalty is disappearing- As the global competition for talent increases, "in demand" employees and applicants are learning that they can now change jobs rather easily, with few negative repercussions. This, coupled with different attitudes toward work among different generations can mean that firm's will face a continuous churn or turnover among workers. This means that turnover rates will soar, even with an increased emphasis on retention. As a result, hiring systems must be scalable to handle the increased hiring load.
9. Continuous learning is the key competency--The faster speed of business requires firms to learn faster than ever before. Knowledge, answers and even skills become obsolete so fast that training, experience and formal education will lose their value quickly. This means a new focus on hiring and retaining those that are self-motivated "continuous fast learners". Internally, this also means firms must develop processes to rapidly and effectively share best practices and common problems (Whole Foods is the benchmark firm) and to update employee skill sets rapidly.
10. Aggressiveness in recruiting will become the norm--More firms are beginning to realize that they will need more knowledge and technology workers, as well as innovators and those that can handle speed. As a result, the competition for these scarce individuals will become intense and aggressive recruiting, beyond what most are accustomed to, is becoming the norm. Active poaching and direct raiding will become much more common.
11. Remote work becomes more common--As communications get cheaper and metrics and technology improve, it is now easier for more employees to work remotely. Allowing new hires to work remotely is a powerful recruiting and productivity improvement tool. This means that Talent Management systems must improve so that the very best talent can work for you, no matter where they choose to live and work around the world. Placing the work “where the talent is”… (or wants to be) is now becoming more possible (Best Buy, Agilent and HP are benchmark firms). Performance metrics must be developed and managers must become educated in how to manage remote workers, if the process is going to generate the maximum return.
12. Hire and release simultaneously is becoming a viable strategy--The skills needed by a firm will fluctuate rapidly as the firm rapidly enters and exits product markets. As a result, firms will need to learn how to continuously hire workers with new skills, while simultaneously releasing workers with obsolete skills. No longer will a firm freeze all hiring when they have to lay off surplus workers. Re-training the skill sets of existing workers will become less of an option, because the types of skills that are needed for cross-industry and innovative products are likely to be quite different. The time it takes to re-train current workers (rather than hiring already experienced workers) will slow time to market too much to make re-training everyone feasible.
13. Business volatility requires a larger percentage of contingent workers--Because market forces are so volatile, business ups and downs will cause the need for labor to fluctuate more than it has in the past. This frequent fluctuation means that Talent Management will have to plan for surges in the workforce. The use of contingency workers (temps, part-time or contract workers) allows a firm to add workers rapidly whenever short term labor needs suddenly increase. On the other end of the scale, because it is easier to release contingent workers, having a significant percentage of your workforce made up of contingent workers allows management to rapidly lower labor costs whenever a sudden down cycle occurs.
14. Labor alternatives increase--In the past, hiring additional employees at your facility was often the only labor option. However, talent managers now must sort through a long list of labor options. Firms must now choose between low cost labor in low labor cost countries and higher cost but better performing and more adaptable labor. Other choices might include substituting technology for labor, outsourcing work, offshoring work, remote work or using contingency workers. Advanced firms must also expand their thinking toward getting ideas not just for employees, but also from customers, vendors and from contests (IBM and P&G are the benchmark firms).
15. Labor arbitrage is now possible--In the past, firms were slow to shift work from one location to another because of unions, loyalty to their home country or simply the cost involved. Now, because of the advances in technology, transportation and communications, firms have the option to shift production or work constantly between different facilities or to new ones based on the region's relative labor costs and quality. This means that advanced talent mangers can relatively frequently shift work to and from areas that have a labor cost, labor quality (Innovation), labor law or even trade law advantages. Instead of being a fixed cost, labor cost and quality are now included as important variables in production and service delivery decision making.
16. A cost cutting mentality impacts overhead functions--In tight economic times, CFO's turn their attention to cutting costs, which means that there will be intense pressure on all overhead functions (including HR) to reduce their budget. Rather than just blind resistance, HR and Talent Management managers must be proactive just to maintain their current resources. The first step is to work with the CFO's office to quantify the impact that effective HR has on increasing product development and revenue. HR must demonstrate the top line dollar impact of great hiring, retention and development. HR must be bold in demonstrating how cuts in HR have direct measurable but unintended real dollar impacts on product quality, innovation, customer service delivery and revenue. And even if they succeed, HR must become less of a “doer” and more of an advisor. Which means being prepared to shift its approach toward becoming more of an internal productivity consulting center (much like an internal management consulting firm). This leaner and more market driven approach provides services when demanded by managers, using a competitive fee for service model.
17. Forward looking replaces a reactive approach--Because of the rapid speed of change, there will not always (as there is today) be sufficient time to merely react to a change and still effectively handle it. Instead, the new Talent Management model requires firms that are forward looking. They must develop systems that can anticipate and then alert management when a talent management problem or opportunity is on the horizon. By preparing in advance with if-then scenarios, the TM function will be prepare d in advance for most of these events.
18. The over-all model shifts towards the sports / entertainment model--The increased focus on teamwork, innovation, speed, quarterly results and hiring / retaining top performers requires the Talent Management model to shift away from the employer / employee model. Instead the model to copy for success is the sports model, which emphasizes top talent in key positions, and prioritization, as opposed to equal treatment.
Whether you like it or not, it’s a fact that world of business and economics is changing at a speed faster than any time in history. As business changes faster, HR must simultaneously increase its own speed of change. Some in HR have chosen to ignore these major changes in business and talent management, but by doing so; they peril their career, as well as their firm's viability. The recent case of high fuel prices impacting the Airlines is a prime example of how external forces can rapidly force changes in the business model. As a result, understanding and adapting to economic forces is rapidly becoming a hot competency and a critical success factor in HR!