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Study finds high-performing companies take a radically different approach to human resources

Workforce issues are critical as companies struggle to emerge from the global recession. Yet many companies are failing to make human resources a priority or to adopt workforce best practices being used by a few leaders. And there are significant gaps between senior leadership and human resources executives when it comes to addressing workforce challenges. Managing talent, leadership development, employee engagement, and strategic workforce planning are the areas that executives feel are most important—and for which they believe they have limited current capability.

Those are the key findings of a new global report by The Boston Consulting Group (BCG) and the World Federation of People Management Associations (WFPMA). The report, Creating People Advantage 2010: How Companies Can Adapt Their HR Practices for Volatile Times, is based on a global online survey that captures the views of 5,561 human resources and business-unit executives from 109 countries in multiple industries. The survey, a follow-up to BCG’s “2008 Creating People Advantage” report, was conducted between December 2009 and March 2010; it was supplemented by detailed, face-to-face interviews with more than 150 senior executives, mostly from multinational companies.

“The report shows that high-performing companies don’t just put more resources into HR—they reboot the function,” said J. Puckett, a Dallas-based senior partner and head of BCG’s Organization practice in the Americas. “Leaders go deeper on human resources issues than their competitors. They focus on flexibility, not on cutbacks, and are more willing and able to use human resources as a strategic partner.”

The survey also indicates that there are significant talent gaps in key industries, functions and geographies, as companies fail to groom new talent to replace current leaders. The gaps will become more acute over time, with many reaching critical levels in the decade between 2020 and 2030.

Among the key findings:

High-performing companies take a radically different approach to HR. They put much more effort than low performers into measuring workforce performance, transforming HR into a strategic partner of senior management, and branding themselves as good employers. These three priorities of top performers ranked dramatically lower at low-performing companies.

  • High performers actually focus efforts on fewer, carefully chosen HR projects, but they keep refining and experimenting in these areas to make them stronger.
  • Excellent financial performance correlates with a corporate focus on employee performance and rewards. (The report defines high performers as companies that have demonstrated top-quintile revenue and profitability growth within their industry over the past three years.)

Companies feel unprepared to meet their most critical HR needs. Respondents identified four areas as most critical: managing talent, leadership development, employee engagement and strategic workforce planning. But they also said that these were among the areas in which they had the least capability at present.

Companies are too short-term-oriented, not paying enough attention to a coming leadership skills shortage at senior levels that will peak between 2020 and 2030. Critical talent gaps threaten multiple companies, industries and regions that will be hard pressed to identify and train future leaders. Fully 56 percent of survey respondents cited a critical talent gap for senior management’s successors.

  • Here again, high-performing companies outpace their competitors. High performers manage to recruit 50 percent of their top executives from internal talent pools. Low-performing companies source only 13 percent of their senior leaders internally. In addition, when developing future leaders, high-performing companies rank people development and effective decision-making higher than do low performers.
  • Companies are failing to draw on the broadest possible array of talent. In 44 percent of companies surveyed, women constitute 10 percent or less of the talent pool.
  • The biggest talent gap is expected in the IT function. Geographically, the largest gap will occur in Japan and in the region of the former Soviet Union. A separate 2010 study by BCG and the World Economic Forum showed that by 2030, the U.S. will face critical talent shortages in IT and business services, construction, healthcare, hospitality, financial services, trade, transport, communications, and public administration.

Strategic workforce planning is a critical but underused tool. The time horizon for workforce planning should be at least as long as the one for strategic planning—five years or more. Yet only 15 percent of respondents said their companies deploy simple workforce supply models, and only 9 percent said they use a sophisticated workforce supply-and-demand model. When it comes to performance measurement, only 27 percent said they use advanced metrics such as value added per person.

Flexibility works and cutbacks don’t—but low-performing companies continue to cut. Flexibility measures, such as streamlined processes and flattened hierarchies, are more effective in period of prolonged economic difficulty than cutbacks are. The German short-time work model, which leverages reduced pay for reduced work, was rated 10 percent more effective than the average measure. Yet low-performing companies continue to use traditional cutback measures such as layoffs, eliminating overtime or reducing training. High-performing companies, by contrast, focused on flexibility.

HR/business unit partnerships show promise—but both sides must improve their skills. 73 percent of respondents said their companies have introduced partnership programs between human resources and their business units, and they consider this the most effective means of connecting HR and line businesses. But skills gaps must be closed. Respondents said that HR executives need to build their skills in business planning and analytics, and that business managers must improve their ability to deal with low-performing employers and to develop HR strategy.

Work-life balance is no longer a priority as employers shift focus to performance. Work-life balance was a top-ranked concern when the survey was fielded in 2008, but rated much lower in 2010. In the 2010 survey, top emerging concerns were enhancing employee engagement and improving workforce performance and rewards.

  • In the U.S., the top priority was leadership development, followed in order by managing talent, workforce planning and employee engagement.
  • Managing work-life balance fell from 4th in the 2008 global rankings to 16th in 2010. Managing change and cultural transformation fell from 5th in 2008 to 12th in 2010. Managing demographics fell from 12th in 2008 to 19th in 2010.
  • “Managing demographics has been greatly undervalued,” said Puckett. “It remains highly relevant to multinational companies, especially as the workforce ages, exacerbating the talent crisis.”

Middle managers are critical for success. They are the key to employee engagement, communicating company values, and the smooth running of the business on a day-to-day basis. But they need to be empowered by being given larger responsibilities, trained for their expanded roles, and more involved in strategic decisions.

“Managing talent, leadership development, strategic workforce planning and employee engagement are the most critical topics around the world, “ said Grant Freeland, a Boston-based senior partner in the Organization practice. “The good news is that they are on the table. But there is much more that organizations need to do to meet HR needs that, if unaddressed, could reach crisis proportions.”

Added Ernesto Espinosa, president of the WFPMA and a coauthor of the report: “The challenge for HR is to bring talent management practices of executives to the next level in order to support business growth.”

Source: The Boston Consulting Group; www.bcg.com.