Rethinking Talent Management Using a People Equity Framework By William A. Schiemann CEO, Metrus Institute The following is a chapter written by Dr. Schiemann for contribution to The Talent Management Handbook by Lance Berger and Dorothy Berger, McGraw-Hill, 2011.
Chapter 51 Rethinking Talent Management Using a People Equity Framework William A. Schiemann, CEO Metrus Institute MOST LEADERS HAVE SIMILAR ACCESS TO CAPITAL, RAW MATERIALS, TECHNOLOGY, AND markets. The major differences among them lie in two areas: their strategy how they have chosen to uniquely position their company in the marketplace and their ability to execute that strategy. And, as Rosabeth Moss Kanter has observed, there are far more firms floundering because of poor execution than because of poor strategy. 1 Arguably, people are the most crucial ingredient in strategy execution. Dealing with talent issues was the number one concern related to strategy execution among a group of 75 executives that were interviewed for Reinventing Talent Management. 2 Talent, they said, is what will make or break their success in the new marketplace. Recent interviews and executive forums suggest that traditional talent models are broken, as observed by Anna Tavis, a senior HR executive with AIG and leader of a Financial Services HR Roundtable group in New York City. Recognizing that talent is clearly important and traditional talent models seem inadequate, the Metrus Institute began examining talent in the context of the new marketplace. We sought to better understand what was deficient about traditional models of talent and what was needed to overcome these deficiencies. As part of this research, the Metrus Institute reviewed and conducted numerous research studies and examined successful versus unsuccessful firms, with the goal of better understanding how talent is or could be optimized in organizations. 505
506 Part VI. Innovative Thinking that Can Shape Your Organization s Approach We will discuss the results of this endeavor by first addressing the context in which talent management is being shaped. Second, we will examine the role of talent in value creation. Third, a new model for thinking about talent optimization will be described, along with ways to measure how effectively talent is being deployed. Finally, we will discuss the implications for several parts of the talent life cycle, such as performance management and leader development. The Talent Context As we began conducting interviews and research, we realized that there were important trends and changes taking place in the environment, which were influencing how talent is acquired, grown, and leveraged. Here are a few of the most significant changes: More for less. While this statement may sound trite, the global balance of supply and demand has changed dramatically, which has had profound implications on business. During the twentieth century, fewer suppliers existed, and customers had to accept the limited products and services that were available for example, one telephone company that offered limited choices. Throughout the world, many suppliers are now competing for the same customers. More with less. Organizations need to become leaner, producing ever more value with scarcer resources. They must optimize productivity in every area operations, services, ideas, and talent. Those who can produce better service enhancements, more innovations, and higher productivity than their competitors will have a value advantage. Agility. Change is the one constant. Technology and emerging global competitors are two major factors that are changing the game constantly for many organizations. Competitors are innovating each day, and customer needs and wants will continue to change at unprecedented levels. This also means that talent will obsolesce faster, presenting a clear challenge and threat to both individuals and organizations. Good talent has choices. Many senior leaders lament losing talent; individuals with specialized skills, such as nurses and engineers; and workers whose jobs required very specific, hard-to-come-by knowledge. These scarce, top-performing players are difficult to replace and demand a premium in good and bad economic conditions. Just-in-time talent. Dr. Peter Cappelli of The Wharton School and others have argued that traditional methods of labor and talent forecasting perform abysmally when it comes to actually predicting talent needs. To remain competitive, organizations are morphing rapidly, making it difficult to stick to the rigid planning models that worked in the past. Cappelli points out that, under normal circumstances, if recently developed people are not deployed in ways that utilize their new skills, they are likely to move on in as few as ten months. Cornering the talent market. If you think about cornering talent, the way Curtis Jadwin thought about cornering markets in The Pit, 3 you are unlikely to be gratified. While a few rare organizations, such as Google, have been able to skim the
Rethinking Talent Management Using a People Equity Framework 507 cream from the top, most firms don t have that privilege. Furthermore, if you were able to select only the best and brightest, how would you continue to develop and reward those premier players so they weren t tempted to leave? Garry Ridge, the CEO of WD 40 Corporation, and Will Kutcha, a vice president of human resources for Paychex, have followed more realistic talent management models, in which they chose instead to make average players great. 4 Ridge s organization generates over $1.4 million in revenue per employee and has optimized talent without selecting and paying for only premier players. His philosophy of helping each employee get an A is a hallmark of a servantleader model that has proven successful in his company. Many slots competing for the right talent. China and India were already pounding out GDP numbers over 5 percent in 2009, while the United States and many other Western nations had negative GDPs. This will mean a pull on the labor market in many areas. But don t assume that this will be universal. Some jobs in some locales may be sidelined forever, such as rust-belt jobs in the United States or Europe. In contrast, there will be high demand for people with the right skills and the right attitude in professions such as health care, energy, high technology, and the right role such as management, which is already scarce in numerous economies. These changes are fueling the need to find new models for managing the talent life cycle (depicted in Figure 51-1). Our research indicates that in many organizations the Optimizing Performance Training Succession Onboarding Retaining Acquiring Recovering Employer Branding Figure 51-1 Managing the Talent Life Cycle
508 Part VI. Innovative Thinking that Can Shape Your Organization s Approach talent life cycle is still being managed within silos: with recruiters, for example, who are totally disconnected from those responsible for onboarding, training, or performance management. To optimize their investment in talent, organizations must stop handling each phase of the talent life cycle in isolation from the others. They must find effective ways to link their business strategy and their people strategy to the talent life cycle. Then they must design adaptable processes, capabilities, and messages to support the integrated model. Given the growing importance of creating value, let us now turn to the process by which value is created and the role of talent in that process. In Search of Value Value represents the perceived benefits gained from anything products, relationships, services compared to the perceived costs monetary, psychological, social of obtaining that thing. There have been a number of models describing how organizations differentiate themselves in the marketplace through the value they create. Treacy and Wiersema 5 describe three alternative models for creating value for consumers: being an operational leader and, therefore, lowest-cost producer; being an innovation leader; and being a leader in customer intimacy. Everyone can think of familiar retail brands that follow these different models. Each has merits, and each can survive and thrive in the marketplace because a sufficient number of consumers find its benefits greater than its costs. For example, Nordstrom s follow the high customer intimacy model; it must find customers who value and are willing to pay for a much higher level of service. Apple is a leader in innovation; it attracts customers who value innovation and design and are willing to pay a premium for them. Each of the two companies follows a value creation model that effectively differentiates it in the marketplace. Connecting this back to the importance of talent in strategy execution, what people or talent strategy will be most effective in each model? As Figure 51-2 depicts, employees of a company that embraces the operational leader model need different Possible People Measures Cost Leader Innovation Leader Customer Intimacy What Values? Efficiency Autonomy Empowerment What Competencies? Cost analysis Idea generation Customer knowledge What Engages? Task fulfillment Creative fulfillment Service fulfillment Figure 51-2 Different Strategies, Different Measures
Rethinking Talent Management Using a People Equity Framework 509 characteristics from those whose employer follows the innovation model, and those who work within a customer intimacy organization require still other characteristics. Performing your job successfully at Nordstrom s requires being focused on, trained in, and committed to service, while Wal-Mart workers are rewarded for efficiency. The most successful Apple employees may not be paragons of efficiency, but they can probably extol the latest and greatest features of new products. Table 51-1 provides a summary of some of the implications of our findings regarding the new talent marketplace and some key questions that every organization should be prepared to answer. Perceived value is making or breaking every organization, including internal functions talent plays a critical role in the value equation. A clear people and talent strategy, which is aligned with the business strategy, is a must. What makes you different from your competitors, and what talent strategy will best fit that model? What are the A roles the roles that are crucial to successfully executing your business strategy? Are those roles populated by A talent? Why do you deserve to get and keep the best talent, especially for A roles? How will you optimize your talent, given limited resources? How will you find the right talent? Talent that is aligned with your business model? Right skills? Committed to the organization? Great metrics are required to evaluate and guide strategy (including talent) execution. How will you know if you are optimizing your talent? How will you know if HR is effective? Does the organization have the Human Resource talent needed to support the business? Do they have the necessary industry and business acumen and a strong understanding of talent best practices? Table 51-1 Implications and Key Questions for Managing Talent Three Powerful Factors Within the context of the identified changes and armed with an understanding of the critical role that value plays, we set out to determine whether or not there is a specific set of strategic talent factors that drive organizational success. If so, discovering these factors would enable organizations to strategically focus resources on initiatives, people processes, and behaviors that are most likely to optimize those factors. It would also reduce the scattered usage, and questionable value, of tactical metrics that are used without focus and purpose in organizations: head count, appraisals completed, time to hire, benefits processed, training cost per employee, exit interview data, suggestions submitted, and so on. We also sought to discover how such factors would influence talent decisions for organizations with different value propositions.
510 Part VI. Innovative Thinking that Can Shape Your Organization s Approach An additional goal of this long-term research was to help answer a key question: What is the connection between investments in human capital (people) and shareholder value or goal attainment in not-for-profit enterprises? Until now, there has been no integrated way for senior management to determine which of the investments they were making in their employees were paying off and which were a waste of resources. In short, there was no way for an organization to measure its people equity. In the late twentieth century, the concept of customer equity emerged as a way to capture the value of customers and connect it to shareholder value. But, on the people side, no such unifying concept had emerged 6 until we introduced the People Equity concept. 7 From an extensive review of the literature and from interviews with individuals in many organizations, we were able to identify three powerful factors that drive organizational success: Alignment, Capabilities, and Engagement (the ACE model, described in Figure 51-3). People Equity is the sum total of the three powerful factors. All three factors have been discussed in the research literature in isolated and varied ways. But as we discovered, all three factors play crucial and interrelated roles in success no matter what the organization s business strategy, industry, geography, or size. Each ACE factor contains some elements that are common across all organizations (e.g., clear goals, under Alignment). There are also elements that are unique to a particular organization and its strategy (e.g., goals that are aligned with a business strategy of being the most customer-intimate organization in the industry). Shareholder Equity Customer Equity Turnover Internal Svc. People Equity Alignment Capabilities Engagement Productivity Quality People Drivers People Investments, Initiatives Figure 51-3 The ACE Model: Alignment, Capabilities, Engagement
Rethinking Talent Management Using a People Equity Framework 511 Let s look more closely at each of the three factors: Alignment is the extent to which employees are connected to the organization s business strategy and goals and the extent to which work units are effectively aligned with one another to deliver high-value products or services to customers. Capabilities are the extent to which the organization effectively creates talent, information, and resources to grow customer value. Engagement is the extent to which employees are willing to go beyond the minimum requirements of their role to provide additional energy or to advocate for their organization as a great place to work, purchase from, or invest in. Impact of ACE Our findings demonstrate that the three ACE factors are drivers and predictors of quality, customer loyalty, talent retention, internal-function effectiveness, productivity, goal achievement, operating effectiveness, and, ultimately, financial performance. Figure 51-4 contains a few of the facts that a good CFO would want to know. Alignment is frequently the best predictor of operating and financial performance, for example, while Capabilities is most often the strongest predictor of customer outcomes, such as satisfaction or retention. Engagement is a strong predictor of employee retention and performance. Collectively, these three factors are a good predictor of overall organizational success. 20% Turnover Companies with high ACE Averaged half the turnover of low ACE companies Were 3x more likely to be quality leaders in their industry Were 2x more likely to be financial leaders in their industry Averaged 56 percentage points higher on Internal Customer Service ratings 15% 10% 5% 8% 17% 0% Top Quartile People Equity Companies Bottom Quartile People Equity Companies Figure 51-4 Impact of Ace Source: Kostman & Schiemann, People Equity: The Hidden Driver, Quality Progress, 2005; Seibert & Lingle, Internal Customer Service: Has it Improved? Quality Progress 2007
512 Part VI. Innovative Thinking that Can Shape Your Organization s Approach We find that People Equity scores vary dramatically not only across but within organizations. For example, a recent study of over 70 hospitals within one hospital group found People Equity scores that ranged from over 90 (out of a maximum of 100) in one hospital to as low as 21 in another. Corroborating the importance of these findings was an acknowledgment by the CEO that the best People Equity hospitals were also the best performers and vice versa in terms of financial performance and patient satisfaction. Which Profile Do You Manage? The three factors of ACE can also display unique codes across an organization, function, or unit of any size. The eight profiles shown in Figure 51-5 capture the combinations of high and low ACE. Each profile carries implications for where value is lost and improvement can occur. For example, in Strategic Disconnect units, it often appears that people are working hard, but in reality many activities may not be adding the most value because they are not fully aligned with the organization s overall strategy, brand, or customers. Similarly, the Under Equipped profile indicates units that are Engaged and Aligned but perhaps don t have the talent, information, or resources to meet customer expectations. What is interesting to note is that while the first four profiles all look high in Engagement, only one is optimal, demonstrating that Engagement alone is not enough. Total organizational performance is driven by all three factors. The implications of these findings are important from a resource and credibility standpoint: Different profiles require different fixes, enabling an organization to target its resources in the areas where they will do the most good. Alignment Capabilities Engagement Profile Superior Performance Cheerleader Under Equipped Strategic Disconnect Under Achiever Indifferent Talent Waste Performance Laggard Figure 51-5 People Equity Profiles
Rethinking Talent Management Using a People Equity Framework 513 Measuring ACE How can ACE be measured? After exploring many other approaches to measuring ACE, we realized that we could obtain most of the information we needed through surveys of employees specifically designed to probe A, C, and E. After all, who is in the best position to comment on ACE? Employees interface with internal and external customers, they are close to resources and information, they either do or do not understand the strategy, and they decide if they are going to expend above-average effort. Ideally, such ACE-focused employee surveys are complemented by customer and internal-stakeholder surveys essentially organizational 360s that effectively pinpoint important gaps. We embarked on a process to capture the essential ACE information by using a calibrated employee survey that enabled us to compare the ACE dimensions on a common 100-point scale, allowing us the ability to compare the relative weakness or strength across the three factors. We also used these data to predict important business outcomes, such as those already shown in Figure 51-4. The Drivers of ACE While the full set of drivers and enablers are discussed in more detail in Reinventing Talent Management, the biggest causes of low scores in the three critical areas include the following: Alignment Lack of clear direction Weak unit or personal goals Measures that fail to connect goals or establish stretch targets Gaps in performance management; most notably, poor feedback and coaching Lack of accountability often connected to rewards Capabilities Poor person-role fit Poorly defined customer expectations and measures A low degree of teamwork Insufficient resources or tools Missing the right information needed to create deliverables in an efficient and effective manner Engagement Supervisory practices that stem from poor communication, lack of respect, or fairness issues Lack of a values fit (e.g., diversity, work-life balance, ethics) Few opportunities for growth/advancement Lack of recognition Leaders who are not respected or inspiring and who fail to model the behaviors they preach
514 Part VI. Innovative Thinking that Can Shape Your Organization s Approach The Implications of ACE As part of our research, we have held numerous roundtables and discussions about the ACE factors with managers and executives from a wide variety of organizations. Out of these sessions have come the following observations and suggestions for improving an organization s ACE scores and, subsequently, its bottom line: The HR function, senior leadership, and direct managers are in a key position to influence ACE, given their roles and ability to influence the drivers of ACE. Supervisors are a very powerful weapon in managing ACE, given their day-today involvement with a number of the ACE drivers. However, the degree of freedom they have to manage ACE is shaped and limited by HR systems and senior leader behaviors, priorities, and policies. For example, supervisors cannot reward employees outside of organization-wide reward policies. Similar HR processes recruiting, selection, onboarding, compensation do not guarantee the same ACE scores Stop one-size-fits-all programs; they are a waste of resources, unless there is fact-based evidence that a particular gap exists across the organization. Instead, tailor solutions that is, coaching, manager training, processes, reward to fit unique gaps or opportunities revealed in the ACE profiles. You can t manage ACE if you don t measure it at every phase of the talent life cycle. For example, it doesn t help to only conduct exit interviews after talent has left; instead, use an ACE survey that is predictive of turnover, especially for A roles and A talent. To achieve maximum impact, it is usually best to first attack the area of ACE that has received the lowest score. Implications for Talent Management What are the implications for and applications of this new thinking about the talent context and the People Equity model? While this chapter cannot cover this subject in depth, we will share a few implications for various stages of the talent life cycle. 8 In each of the management areas below are some Fast Facts that come from a review of research and from interviews with experts in each field. Following these are Potential Actions you can take to improve results in these areas. Rethinking Performance Management Fast Facts: Performance appraisals are only one component of performance management, but they are often the most damaging one because they create a fundamental conflict between Alignment and Engagement, while minimally improving Capabilities, and they are not helpful in development and performance improvement. 9
Rethinking Talent Management Using a People Equity Framework 515 Potential Actions: Make performance review discussions part of everyday life. Organizations like Intel expect their managers to have five- to ten-minute conversations with their employees weekly. These conversations afford opportunities to managers and employees alike to share successes, problems, and challenges. They make performance reviews a regular part of organizational life, enhancing Alignment and gaining manager understanding and support for Capabilities gaps, without driving Engagement down. Helping employees get an A. Organizations like Smith Bucklin and WD 40 Corporation focus on making average employees great by building motivational and reward models that drive high ACE. They assume that all employees want to excel. They communicate clear values and performance norms that create peer pressure to perform. They establish leadership roles that call for managers to help employees maximize their potential. Talent Acquisition Fast Facts: Talent acquisition metrics are often weak and drive inappropriate behaviors. The hiring process for many organizations is expensive and far from effective; the average failure rate is about one in three with even good selection systems. With poor ones, it is no better than chance. 10 There continues to be an over-reliance on the interview, which, as used, often has poor validity. Organizations have been their best at hiring for the C factor (i.e., selecting for specific skills, abilities, or experiences). Organizations have been weakest at hiring for fit on Alignment and Engagement (i.e., hiring people who have the propensity to become Aligned and Engaged). Potential Actions: Build more strategic talent acquisition metrics, reducing the importance of transactional metrics, such as time to hire or fill rates, and replace with more strategic ones, such as the percentage of hires that hit performance or retention targets. ACE is also a good success criterion. How many hires hit high ACE scores after 3, 6, or 12 months on the job? One improvement to the interview process is building in behavioral indicators that predict hires who will be high on Alignment and Engagement with their role, manager, and the organization. Developing Leadership Talent Fast Facts: Leaders are far better at hitting the What than the How. That is, leaders and managers are held more accountable for hitting the numbers than they are for how they hit them which is largely through strong talent.
516 Part VI. Innovative Thinking that Can Shape Your Organization s Approach Most managers are far more proficient in technical skills than in people skills. A large percentage of hires are based on past performance and not on the potential to grow and leverage talent. This is a key reason why the failure rate is so high when organizations attempt to promote sales reps to managers. A recent review of the research on Leader Development commissioned by the SHRM Foundation shows that it is too much art and not enough based on fact and evidence. 11 Potential Actions: There is a strong need for better people measures, which provide stronger evidence as to how well managers are optimizing talent. Without such measures, senior leaders must rely on hearsay and the intuition of a limited sample of managers sometimes only the boss about how well talent is being developed and managed. The ACE survey measures described earlier enable leaders to get an organizational view of their talent reservoir and how it is being developed and utilized. Teach ACE holistically. Because ACE represents the three key factors that optimize talent, managers must be educated on how they can manage each of the factors, how to detect gaps, and how to get to the root-cause fix. Engagement training alone will not do this. Talent management capabilities must be viewed and developed holistically. We have just touched the surface of potential changes that can be made to the talent management framework and life cycle (see Figure 51-1). Notes 1. Kanter, Rosabeth Moss. When giants learn to dance. New York: Simon & Schuster, Inc. (1989). 2. Schiemann, William. Reinventing talent management: How to maximize performance in the new marketplace. New York: John Wiley & Sons, Inc. (2009). 3. Norris, Frank. The pit. (Lenox, MA: Hard Press, 2006). 4. The 11th Annual SHRM Foundation Thought Leaders Retreat, Positioning Your Organization for Recovery, October 5 6, 2009, Scottsdale, AZ. 5. Treacy, Michael, and Fred Wiersema. The discipline of market leaders. (Reading, Mass: Addison-Wesley Publishing Co., 1995. 6. Except perhaps the broad notion of Human Capital, but this was flawed because it either drove macro-economic treatment of people, missing important individual factors, or it was used as a catchall for anything dealing with people. Also, it was often used within the context of capital conservation, rather than value creation. 7. We labeled this concept People Equity to be consistent with the notion of value that can be grown or depleted over time, representing the aggregate value of people as it relates to customer equity and shareholder equity. 8. For a further treatment of these subjects, please see Reinventing Talent Management (Schiemann, 2009) or articles at www.metrus.com.
Rethinking Talent Management Using a People Equity Framework 517 9. For example, Jerry Seibert, Global Director of Diagnostic Services for Metrus, reports that only 60 percent of employees say that their last performance review helped improve their performance. 10. Levin, Robert A., and Joseph G. Rosse. Talent flow: A strategic approach to keeping good employees, helping them grow, and letting them go. (San Francisco: Jossey-Bass, 2001). 11. McCauley, Cynthia. Leader development: A review of research. Center for Creative Leadership, Literature Review commissioned by the SHRM Foundation (2008).