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What technology can (and can't) do to help companies optimize their most valuable asset.
Scott Leibs, CFO IT
September 15, 2005
Fifty years ago, a man wrote to Look magazine columnist Norman Vincent Peale, asking, "What should a person do who is unhappy and bored in his job after twenty years, but who earns a nice salary and hasn't the nerve to leave? He'll never go any higher in salary and position, but will always have a job."
In the half-century since, many aspects of the employer-employee relationship have changed — noticeably the assumption of guaranteed employment. But boredom and unhappiness have not gone out of style, nor have companies managed to achieve perfect alignment between corporate strategy and the day-to-day activities of their workers. There remains only a tenuous connection between pay and performance, companies routinely lay off valuable workers and then spend large sums to recruit less-capable employees, and the incessant labeling of the workforce as a company's most-valuable asset seems wholly at odds with the scant efforts most companies make to optimize it.
Now, however, a number of people in industry, academia, and consulting say that companies are starting to heed their own rhetoric regarding those valuable employees. With costs already cut to the bone, a renewed focus on growth, concern that demographic trends may result in a shortage of talent, and a greater appreciation of the efficiencies that can now be brought to bear, some companies are pursuing a range of "workforce-optimization" strategies.
Often described as "the right person in the right place at the right time at the right price," workforce optimization combines managerial discipline with newer forms of information technology to produce, in theory, everything from perfectly staffed assembly lines to efficiently deployed consultants to well-crafted succession plans. At its most basic, it builds on earlier time-keeping and attendance systems in order to improve staff deployment. At its most sophisticated, it is essentially synonymous with human-capital management (HCM), a "full life cycle" approach to employees that encompasses everything from recruitment and hiring through training, career development, and compensation. While the ultimate goal — greater productivity and efficiency — is certainly in a company's best interest, many facets of workforce optimization are explicitly designed to improve the career prospects and job satisfaction of employees.
But the man who wrote to Peale 50 years ago wasn't simply born too soon, since many of his grievances remain valid today. What might be called the "people paradox" (employees are simultaneously essential and expendable) bedevils many companies, in part because no single executive or department truly "owns" the workforce. When asked, "Who takes primary responsibility for managing and assessing workforce performance?" the CFOs we surveyed were divided (see "Survey Says"). An almost equal number opted for either line management or senior management, and nearly as many said responsibility is shared between the two.
More tellingly, when we asked CFOs where they would focus attention if they wanted to increase the value their companies derive from their workforces, two-thirds cited employee training. Yet when we asked what drives employee effectiveness and productivity, only one in five CFOs pointed to formal on-the-job training. The most common answer to that question, given by 60 percent of respondents, was compensation and other rewards, but only 22 percent said that more-generous compensation and benefits were key to increasing the value of the workforce.
In short, CFOs seem conflicted about human capital, seeing in it plenty of potential but also uncertain returns. Most companies have automated many or all of the administrative functions associated with human resources, but when HR executives pitch workforce optimization as a logical next step, finance is not necessarily an ally. And in this era of the "free-agent nation," in which employees are no more loyal to companies than companies are to employees, finance may have a point. In fact, while compensation was deemed the top driver of employee productivity, employees' innate drive and capabilities ranked a close second, suggesting that many CFOs take a decidedly laissez-faire attitude toward the labor market.
There are exceptions. Mark A. Buthman, senior vice president and CFO at Kimberly-Clark Corp., is a self-confessed zealot when it comes to talent management, and has played a lead role in his company's recent efforts to align its workforce with corporate strategy. "A partnership between finance and human resources makes complete sense," he says. "This is an issue that's right in the CFO's wheelhouse, because people and information are the only two assets we own, and this combines them."
Kimberly-Clark's embrace of talent management, which is essentially synonymous with human-capital management and focuses on the assessment, development, and compensation of employees, may seem curious given its recently announced decision to cut 6,000 jobs between now and the end of 2008. But Buthman says that not only is there no contradiction, but in fact the workforce reduction and the new emphasis placed on leveraging talent go hand in hand. Advances in manufacturing technologies now allow factories to produce more goods with fewer employees. At the same time, a new focus on streamlined operations, high-growth markets, and R&D means that the employees who remain must be able to function at a higher level. That is, in order to get more from each employee, companies will have to invest in them accordingly.
Talent management at Kimberly-Clark combines process with automation. The company began by having a global team formalize various evaluation practices that the company had used inconsistently. The result is a program of quarterly performance discussions between an employee and his or her boss that, combined with a "multirater feedback" system (often called a 360-degree review) provide the foundation for the actual performance review. Buthman says some employees have monthly coaching sessions with their bosses, and he readily admits that some managers expressed concern that the new system would have them spending an inordinate amount of time on personnel issues.
That's where technology comes in. As Kimberly-Clark's global team developed the new process, it also shopped for software that could support it. A suite of HCM applications from SuccessFactors Inc. now helps speed the review process, in part by supplying a "robot" that provides thousands of sample phrases and assessments to help managers write reviews. Buthman says a review that once took him six or seven hours to prepare can now be done in a third of that time. And the software provides visibility into the overall program. "A year ago, if you had asked me what percentage of our employee base had been effectively reviewed," Buthman says, "I would have had no way to tell you. Now I can see that 97 percent of our employees have gotten the appropriate reviews. And I also know who the 3 percent are who haven't, and why that is."
As with other new vendors in the HCM software market, SuccessFactors offers its products as a full suite or as individual applications via the software-as-a-service model, in which it hosts the software in its own data centers and prices it on a per-employee basis. That lets customers start small and build, and avoid large, up-front capital outlays. "We're like an ATM," says Lars Dalgaard, SuccessFactors' CEO. "People walk up to us with various needs and we respond instantly." More important than the delivery model, Dalgaard says, is the intent behind the software. "We change people's lives," he says. "Think about how much time you spend at work. Don't you want clarity into what you're doing and why, and where you're going?"
"Every employee needs a clear line of sight between what they do each day and how it relates to our global business plan," Buthman says. "That's how they understand the contribution they make. That's part of what makes them feel engaged by their jobs." And engagement, Buthman and others say, is critical to productivity, even if it can be hard to quantify. "You can get in trouble attempting to apply generalized metrics to all knowledge workers," says Tom Davenport, who holds the president's chair in information technology and management at Babson College and is the author of the newly published Thinking for a Living: How to Get Better Performance and Results from Knowledge Workers (Harvard Business School Press). "Companies often embark on these projects because of a pain point. And while they might measure the effect on that pain point — such as a health-care company that reduces errors thanks to a new training initiative — translating that to an ROI is difficult."
Buthman agrees, although he says that Kimberly-Clark is now developing an index to measure employee engagement, and he does expect verifiable improvements in productivity over time. David Ulrich, author of Human Resource Champions and a professor at the Ross School of Business at the University of Michigan, says, "When people are engaged, they give their 'discretionary energy' to the company, their best-quality work, and companies benefit enormously from that, even if they can't quantify it."
The connection between employee engagement and productivity may be opaque, but the link between performance and pay is much clearer — or could be. One problem with performance reviews, many experts say, is that managers often lack visibility into an employee's achievements throughout the year and instead tend to make decisions based largely on what the employee has (or hasn't) done lately. Many HCM software companies cite this as a reason to buy a full suite of products that can address everything from hiring and performance management to compensation and career planning. As Buthman says, "The ability to differentiate among performers and match those differences to pay really completes the loop."
Greater visibility into the workforce can pay off in other ways as well. IBM's Workforce Management Initiative, which was launched last year, involves building a profile of the skills and background of every employee so that, as one example, consultants in its Business Consulting Services unit can be deployed more efficiently. "We wanted smarter utilization of our labor," says Harold Blake, IBM's director of workforce optimization. "We wanted to minimize the time consultants spend 'on the bench' and get them on the engagements they're best suited for. At the same time, we wanted to see who has been to London and Tokyo and Los Angeles in the past month and maybe needs a break and shouldn't be shuttled off to Paris." One goal, he says, is to enhance the profitability of each engagement by staffing it optimally.
Another goal is to spend the company's annual $800 million training budget more wisely. Having hashed out a "common taxonomy" that reduced 10,000 hazily defined job roles to just 524, IBM creates a profile for every employee based on a primary role, a secondary role, and information about other skills the person may have. This allows the company to assess which employees are ripe for "up-skilling." If it anticipates, say, a sharp rise in the need for open-source programmers and can identify high performers in roles that may soon be obsolete, it can give them priority in training. That way, the company hangs on to good people and is spared the expense of competing for talent in the open market.
Such efforts also demonstrate good faith on the part of the company. "There was some concern when we started that employees would equate being 'optimized' with us squeezing more work out of them and making them feel like cogs in a machine," says Blake. Perhaps not without reason, given that Blake came to his new post from IBM's hardware empire and was charged with applying the same supply-chain principles to people that he had previously applied to, well, machines. "Unlike hardware," he says, "people can learn, so we invest in them and improve their skills. In fact, we have researchers who are studying 'optimization algorithms,' or how to get a person from point A in their career to point B as effectively as possible."
Randy MacDonald, IBM's senior vice president for human resources, says that as companies apply new kinds of technology to HR issues, they must also apply new measurements. "The CFO gets to see the CEO faster than anyone else," he says, "because he or she can show a series of metrics. HR is now doing the same." Some of those metrics are old hat, such as time to hire, attrition rates, and revenue per employee. But increasingly, HR departments are looking at other facets of the labor market. IBM, for example, looks at everything from the percentage of summer interns who sign on for full-time work to a rolling three-year forecast of anticipated labor needs. HCM software companies have added various metrics capabilities to their products, or partnered with business-intelligence firms that offer a range of "workforce analytics" applications.
Some Employees Are More Equal than Others
Once companies identify top performers, they shouldn't hesitate to treat them accordingly. Matt Brush, director of human-capital planning at Corning (which uses HCM software from Softscape), says that as part of its efforts to make a more strategic contribution to the enterprise, the HR department should take a portfolio approach to managing talent. "Every job is not equally important," he says, "and every employee shouldn't get an equal slice of the training budget. You need to identify the roles and the people who are most influential to your success and invest the most in them."
The "all employees are not created equal" message is sometimes anathema to HR executives, but it reflects a new pragmatism taking hold at many companies. Advance Auto Parts, a retailer with more than 2,500 stores in North America, began to "recalibrate" its workforce three year ago in response to poor performance.
"Our sales per store, inventory turns, shrinkage, and other metrics didn't match our competitors," explains Doug Bryant, vice president of organizational development and training. "When we drilled down, we saw that the reason was people. Some performed at a high level, while others fared much worse." When a talented manager was relocated to a poorly performing store, for example, things improved quickly.
It developed a talent-management process that it implemented manually at first, then automated last year (with software from Authoria that integrates with an underlying system from Oracle/PeopleSoft). "The system gives us data we can analyze to see where competencies are strong or weak," says Bryant. That holds true not only at the store level, but even higher up the food chain. "We saw that at the general manager and VP levels, some people needed more business acumen, so we're working with universities to develop appropriate training," he says.
The effort to build what Bryant calls a "high-performance workforce" has led to other discoveries, notably the importance of making smart hires. "We changed gears and reallocated funds from training to a more-formal interviewing and hiring process," says Bryant. "We realized that getting good people from the start makes a huge difference. Capturing data on employees allows the company to do things that were impossible before. "Regional VPs rate their employees on 14 competencies," says Bryant. "When that was manual, we had no way to look across all those paper reports and spot good candidates or understand training needs. But now we can search it and get a much better window into the workforce."
Fifty years ago, that Look magazine letter writer was advised by Peale, the power-of-positive-thinking guru, to "wake up mentally" and develop a greater appreciation for the possibilities within his current position. Now, it appears, it is companies that are waking up. Slowly, perhaps, but the early risers may have much to gain.
Online Talent Shopping
The Internet has shortened the distance between employers and potential employees in any number of ways, from providing companies with a more-economical way to post job openings to sparing job seekers the annoyance of a Sunday spent scouring the help-wanted section.
Now, some companies are seeing the Web as a way to not only post jobs and economically process applications, but also as a way to build relationships with future staff members. Federated Department Stores Inc., for example, has a Website called Retailology that is designed to attract both entry-level and experienced workers.
The site's initial goal was simple: present retail as a viable career option to new college graduates, and Federated as a particularly enlightened employer. That proved so successful that over time, the company has expanded the site's capabilities; last October, during a 10-week pilot that coincided with the holiday hiring period, 49,000 people self-selected interview times after having submitted their resumes and passed the first round of screening.
Susan Burns, operational vice president for employment initiatives and college relations, says that while the front end of Retailology is essentially informational, the back end is a heavily automated candidate-tracking system that replaces a once intensely manual task, freeing HR staff to address "talent-opportunity areas." For example, if a promising candidate applies when there is no suitable opening, a Federated recruiter will maintain a dialogue with that person and alert the individual when an opening occurs. "Handling that kind of follow-up was virtually impossible when everything was paper- and phone-based," she says. Today, more than one quarter of the 100,000+ employees hired by Federated apply via the Web, and that percentage is growing. "No doubt it's a very cost-effective way to extend your reach," Burns says. "We expect the talent market to get even tighter, and we'll need more tools like this in order to keep the pipeline flowing." —S.L.