A New Vision for HR Management: The Workforce Ecosystem

Inquiry By Karie Willyerd NO. 33 A New Vision for HR Management: The Workforce Ecosystem FOR MUCH OF THE 20TH CENTURY, COMPANIES USED EMPLOYEES AS A BUFFER AGAINST ECONOMIC CHANGES, LAYING PEOPLE OFF WHEN DEMAND DECLINED AND REHIRING THEM WHEN TIMES IMPROVED. SAP Center for Business Insight Brief Q&A Case Study Inquiry E-Book 1

Today, product life cycles are shorter, financial markets are more volatile, and workers jobs along with their skills become obsolete more quickly, thanks to technology. When employees are laid off today, it s often because their jobs have disappeared, being replaced by machines, software, or lower-cost labor thousands of miles away. Predictably, employees are less loyal in this new era, which means that those with the right combinations of skills disappear even faster, lured away by better offers or the opportunity to work independently. Companies must often spend large sums to replace those people, if they can replace them at all. These are the people who are creating the knowledge capital and intellectual property that increasingly define company value. Indeed, research shows that talent is a critical component of corporate performance. 1 A Gallup 2 study finds that actively disengaged employees the 18% who are so unhappy that their inactivity undermines their colleagues work cost U.S. businesses up to $550 billion annually. Meanwhile, companies with a high percentage of engaged employees those who are involved in, enthusiastic about, and committed to their work outperformed their competitors in profitability, productivity, and customer ratings. 2 Inquiry: A New Vision for HR Management: The Workforce Ecosystem 2013 SAP AG or an SAP affiliate company. All rights reserved. NO. 33

In 1979, workers received 2.5 weeks of training per year; in 2011, nearly 80% had received no technical training in five years. Treat Workforce Planning Like an Investment Portfolio Yet organizations often leave workforce decisions largely to chance. In his 2012 book, Why Good People Can t Get Jobs 3, Wharton School professor Peter Cappelli observes that many companies have great difficulty seeing the supply of talent to their organization as the kind of business problem they routinely address in sophisticated, analytical ways. Companies need to start looking at the workforce like any other important investment portfolio, with an increased emphasis on meeting shifting needs over time and stepped-up investments in learning and development. Unless companies pay attention to building their organizational capability, they won t be able to deliver the business results they expect in the future. Skills Are the New Loyalty Contract Skills development must become the new instrument for building and maintaining employee loyalty. According to research Cappelli cites in his book, workers in 1979 received 2.5 weeks of training per year; in 2011, nearly 80% of workers had received no technical training in five years. Employers and employees both would benefit from creating a corporate environment that emphasizes acquiring skills over time and in a variety of roles, rather than sticking employees in narrowly defined roles that don t change until the employee leaves the company. Such training would reduce disruption for both parties as markets shift more rapidly and the old loyalty contracts disappear. Emphasizing skills, however, means that companies must plan for much more employee movement both inside and outside the company. That presents a problem: Companies can t afford to train every employee for every role, and employees, especially younger ones, no longer expect to stay with one company forever. To build a higher-performing, more-sustainable workforce, companies must deepen their relationships with current employees by investing in training and development that aligns employees interests, talents, and career goals with business needs. It s a critical factor in building employee loyalty. In a Deloitte survey, lack of career progress topped a list of five major factors that would push employees to look for a new job. Meanwhile, 72% of respondents who planned to stay with their current employer reported having jobs that made good use of their talents and abilities. 4 NO. 33 2013 SAP AG or an SAP affiliate company. All rights reserved. Inquiry: A New Vision for HR Management: The Workforce Ecosystem 3

Keep in Touch But employers must also engage with a talent ecosystem that includes former employees and contingent workers such as contractors and temporary workers. gain by recruiting them back when the time and the situation are right. Former workers with fresh skills can become productive more quickly because they re already familiar with company operations and culture. Why? Because when employees leave voluntarily, they re not just pursuing better salaries. They re after new challenges and growth opportunities that their current employer can t deliver. Meanwhile, research shows that contingent workers, those hired for fixed periods rather than permanent positions, are increasingly important to corporate performance. According to the Institute for Corporate Productivity (i4cp), high-performing companies use contingent workers more often and more strategically than low-performing companies. 5 Firms can t provide job security anymore, says Alexander Spermann, director of talent management, flexworker, and public affairs with Randstad Germany, an employment services firm. Workers who are released because of corporate restructuring, a decision to outsource, or the end of a contract will have difficulty finding new work if their skills aren t up to date. So people pursue a different type of security, says Spermann. They look to get experience that will make them employable in the labor market over the long term. As former employees gain valuable skills elsewhere, companies stand to More companies, especially large ones, expect to increase their contingent workforce during the next decade, according to the Society for Human Resources Management (SHRM). 6 Contingent workers may include agency workers filling temporary positions, freelancers hired for specific projects, and outsourcing partners handling important business functions. The size of this external workforce is already significant. Though estimates vary, an Accenture study 7 reports between 20% and 33% of the U.S. workforce are contingent, or independent, workers. Contingent or Independent workers are 20% 33% of the U.S. workforce. Old HR Models Are Dead Yet HR management practices at most companies aren t designed to engage with a flexible workforce of employees and contingent workers. They re stuck in the last century: too rigid and incompatible with business demands to hire more quickly and develop workers with the latest skills in the shortest time. The old performance management model was designed for a hierarchical organization where we evaluated everybody once a year and gave them a raise and decided who is going to get promoted, says Josh Bersin, principal and founder of Bersin by Deloitte. No company actually runs like that anymore, but every major company still does performance management that way. Few companies align their recruiting, hiring, and workforce development with their long-term business strategy, as they do their financial portfolios with their needs for cash and capital. Rather than plan for their short-, medium-, and, long-term talent needs, they end up scrambling for vital skills because they haven t systematically identified those needs or how they ll fill them. 4 Inquiry: A New Vision for HR Management: The Workforce Ecosystem 2013 SAP AG or an SAP affiliate company. All rights reserved. NO. 33

Don t Limit Training to Current Employees Companies need to take what Cappelli calls a portfolio management approach to talent 8 : coordinating the hiring and training of workers across corporate divisions. That way, Cappelli argues, you can hedge your bets about how many people, with which skills, you should have on board, as well as gain flexibility to develop employees for new assignments and shift them to different teams as business needs dictate. Because forecasts inevitably go wrong, Cappelli says, companies should balance their investments in employee development with hiring from outside the company to fill unanticipated gaps. What s more, HR departments must get more involved with recruiting, onboarding, training, and evaluating contingent employees. Doing so is essential to building relationships and developing employees who may become candidates for other short- and medium-term roles or for permanent positions. At many companies, hiring contingent workers is the purchasing department s job. But, says Spermann, if HR takes responsibility for contingent workforce planning, then they are able to think about how to treat these workers like regular staff, and, depending on the workers performance and demand for their skills, the company can consider them for permanent positions. He continues, You have to organize that in a systemic way so that workers can make transitions quickly and be trained and become productive. (See Embrace the Talent Ecosystem. ) Embrace the Talent Ecosystem It s a safe bet that managers and project leaders everywhere keep lists of people they want to have on their teams lists they can turn to whether they need someone for a temporary project or for a permanent slot. At the very least, they have their social media connections. But companies that want the best employees must develop a talent ecosystem that extends beyond corporate boundaries. When a company s workforce needs to shift rapidly, business leaders shouldn t leave it to individual managers to identify the individuals they should try to hire. HR needs to step up by doing the following: Keep in touch with alumni. Good employees often leave companies for reasons that have nothing to do with their performance: they find better opportunities or get laid off when business needs shift. After the exit interview, any relationship they have with their former employer usually depends on the personal connections they maintain. Companies that want to lure the best workers back need to make them always feel welcome. For example, Jeanne Meister, a former Accenture vice president, notes that Accenture maintains a robust alumni network, providing former employees with networking opportunities and information about the company, including current job and short-term contract openings. If a bigger percentage of your workforce is going to be contingent workers, you should consider forming an alumni network for them, she suggests. Dive into social media. Job seekers now target companies where they want to work by following them and their employees on social media sites like Facebook and Twitter. They re building relationships with people that they want to work with, until they know them well enough to send them a résumé. HR managers can use social media the way some big recruiters do: by analyzing publicly available social data to identify people whose activity suggests they might be interested in a new job. Establish relationships with talent placement firms. They re not just for filling temporary vacancies. While some companies may have internal pools of software developers who move from project to project, for example, a lot of that flexible work will likely be provided by contingent workers in the future. Companies can tap talent placement agencies to manage the assignment and reassignment of those workers and even assist with training them. Be a great place to work. At a recent meeting of technology executives, a CTO was asked how he was coping with the perceived shortage of IT talent. The CTO responded that he had no trouble finding workers, because the company has a reputation as a top employer. Research from Gallup shows that workers are most engaged when they believe in the purpose of their work. They re also more loyal when employers help them develop their skills and mentor them along a career path. According to Meister, who is also the co-founder of Future Workplace, it s up to HR to cultivate and promote the company s employer brand. That includes the company s values, purpose, and opportunities for career growth. NO. 33 2013 SAP AG or an SAP affiliate company. All rights reserved. Inquiry: A New Vision for HR Management: The Workforce Ecosystem 5

Get HR to the Strategy Table An HR management strategy focused on harnessing the abilities of a workforce spread across a wide network requires a business-focused HR team, steeped in analytics. That team must guide managers in ways to seek and develop the workers they need. However, traditional attitudes about employment linger among line managers who discourage employees from diversifying their skills and experience and among leaders at every level who focus mainly on the cost of payroll, not the benefits of investing in workforce development. Understand the Economic Trends Corporate chief HR officers must be well versed in macroeconomic trends and must understand how they will support the new skills their companies will need, such as hiring college graduates or buying companies in other parts of the world, says Meister. According to SHRM, business acumen including knowledge of metrics and data, as well as operations and logistics will be the most important competencies for HR professionals 10 years from now. Companies should be able to turn to their HR departments for help connecting their business goals with employee hiring and development goals. However, although HR isn t strictly an administrative function anymore, many HR professionals aren t well versed in business operations or market trends. That leads to people being treated badly and company goals becoming undermined. For example, if business leaders decide to expand quickly into a new market or pursue an innovation opportunity, they may be better off hiring people who are knowledgeable enough to get the business off the ground and then developing them as it progresses. A strategic, business-focused HR department can advise them on how to proceed. KNOWLEDGE OF METRICS AND DATA, AS WELL AS OPERATIONS AND LOGISTICS, WILL BE THE MOST IMPORTANT COMPETENCIES FOR HR PROFESSIONALS 10 YEARS FROM NOW. 6 Inquiry: A New Vision for HR Management: The Workforce Ecosystem 2013 SAP AG or an SAP affiliate company. All rights reserved. NO. 33

Invest in Data A comprehensive view of the workforce, both employees and contingent workers, has become essential to making even basic HR decisions. It s not enough, for example, to know the average age of the workforce; you must also know whether most people in a particular job category are likely to retire around the same time so you can plan to address the gaps. But First, Find the Data Myth-busting insights like these don t come from intuition; they come from sophisticated analytics. Yet many companies aren t ready for such analysis. They re still struggling to deliver an integrated, consistent, trustworthy view of employee data to business managers, consolidating data from different systems into a source that business people can access. Fewer than 20% of companies rely heavily on analytics to manage their workforces. < 20% 0 10 20 30 40 50 60 70 80 90 100 A utility company, for instance, began a knowledge transfer program to capture the expertise of its rapidly aging workforce. The choice about how to deliver it was heavily influenced by the age of its incoming workforce, (which is young), and how it consumes media. The company provides them with mobile training modules, which workers can access whenever they need to know something. But there s deeper insight in HR data for companies that can mine it. Managers can use data to make better personnel and training decisions, as well as to show how they contribute to business results. For example, a study by the University of California, Berkeley 9, crunched data on characteristics including productivity, personality, education, and intelligence of workers in the high-tech, trucking, and call-center industries. Researchers found that workers hired through employee referrals were less likely to quit and more likely to perform better but only when the referring employees were also high performers. Market research company Aberdeen Group has found that fewer than 20% of companies rely heavily on analytics to manage what it calls a total talent approach to the workforce, integrating the hiring and management of employees and contingent workers. Thirty percent of companies use analytics only somewhat for this purpose. 11 While they re corralling the data, companies need to ensure that they comply with local laws that protect employee privacy, as well as establish clear policies to govern data access and use 12 to beef up the analytics capabilities of their HR teams. Cappelli suggests that most companies don t know, for example, what it costs them to leave jobs unfilled. Companies may save money by hiring someone who is not perfectly qualified for a job and training them, he writes. But only the largest HR departments have the capability to perform that type of deep analysis. Meanwhile, McKinsey has reported that companies typically don t measure how employee training programs contribute to business outcomes. 13 Other studies are uncovering more counterintuitive correlations. Managers tend to look unfavorably on workers who job-hop, thinking the company may not get a return on its investment in that person s training. But an analysis of call-center workers 10 found that workers who had held many jobs in the past were no more likely to quit their current jobs than those who weren t job-hoppers. NO. 33 2013 SAP AG or an SAP affiliate company. All rights reserved. Inquiry: A New Vision for HR Management: The Workforce Ecosystem 7

Focus on Early Development Every company says its workers are its most important asset. But it s not until business leaders start viewing payroll as an investment that they can take the next crucial step: creating a learning-focused organization that aligns workforce development with business strategy. Companies that have a culture of development are enduring companies, says Bersin. They survive recessions better [and] have higher-performing employees and lower turnover. Employees, especially workers at the beginning of their careers, want development help. The survey of 2,200 professionals for The 2020 Workplace: How Innovative Companies Attract, Develop and Keep Tomorrow s Employees Today 14 found that millennials, who will make up 50% of the global workforce by 2020, want most to work for a company that will develop their skills for the future and learn technical skills in their area of expertise. Giving millennials what they want is better for companies. An analysis of corporate performance following the 2001 economic downturn found that firms that aggressively invested in employee development outperformed the S&P 500 Index. 15 (See Why Millennials Will Change HR Management. ) Mobile technology, social tools such as YouTube, and the emergence of free online university courses (known as massively open online courses, or MOOCs) make it more cost effective to deliver training and development to employees, offering HR departments ways to cope with tight training budgets. Peer-to-peer learning, such as presentations, videos, and webinars delivered by in-house experts, is already playing a larger role in corporate training, replacing classroom-taught courses. Employees like on-demand learning because they can access it when they have time or when the information is most important to know. Why Millennials Will Change HR Management Millennials (those born between 1980 and 2000) will make up 50% of the global workforce in 2020. Companies have to provide more than a paycheck to keep them engaged. 81% 67% 65% 50% 20% Are either looking for a new job or open to considering an offer. Value learning from mentors or colleagues or through job rotations rather than formal training. Chose their jobs based on opportunities for personal development. Are happy with their career progression. Expect to work for themselves, wherever they want, in the future. Note: percentages may not add up to 100 due to rounding. Source: PricewaterhouseCooper, Millennials at Work, 2011. AN ANALYSIS OF CORPORATE PERFORMANCE FOUND THAT FIRMS THAT AGGRESSIVELY INVESTED IN EMPLOYEE DEVELOPMENT OUT- PERFORMED THE S&P 500 INDEX. 8 Inquiry: A New Vision for HR Management: The Workforce Ecosystem 2013 SAP AG or an SAP affiliate company. All rights reserved. NO. 33

From Trainers to Curators To accommodate this shift, HR s role in training has to change from creating training courses to curating resources from experts both inside and outside the company. Curating requires research and content management skills rather than instructional design skills, as well as a stronger partnership with business managers. Bersin tells of a company that recognized it needed to offer employees more development opportunities so it mandated that everyone take 40 hours of training. That s a step in the right direction, he says. But just the fact that I signed up for training isn t meaningful unless a manager has told me what training to take and why I should take it. To engage the managers and encourage on-the-job learning, HR could mandate managers spend time with their teams every week to reflect on current performance. Help the Rest of the Company Perform Better When HR advances from an administrative role to a strategic one, managers do a better job, and companies are more likely to achieve their goals. For example, i4cp has found that high-performing organizations are more likely than low-performing ones to engage in workforce planning on multiple levels: for running daily operations, for managing expected changes in demand (such as new store openings), and for long-term leadership. 16 Fulfilling a strategic role requires HR to create policies, practices, and tools that facilitate what their businesses need (a flexible workforce with up-to-date skills) and what workers want (meaningful work and development opportunities). HR leaders will know they ve transformed their role when workforce decisions are embedded in business decisions and when workers, whether or not they re employees, view the company as a place to build their careers. NO. 33 2013 SAP AG or an SAP affiliate company. All rights reserved. Inquiry: A New Vision for HR Management: The Workforce Ecosystem 9

There s more. DOWNLOAD THE EXPERT Q&A HOW TO BUILD A MORE SUSTAINABLE RELATIONSHIP BETWEEN COMPANIES AND EMPLOYEES. Karie Willyerd is vice president for learning and social adoption with Success Factors, an SAP company, and is co-author, with Jeanne Meister, of The 2020 Workplace: How Innovative Companies Attract, Develop and Keep Tomorrow s Employees Today. Thanks to J.P. Finnell, head of mobile strategy and FSI mobile co-innovation, SAP Services North America, for his insight and to Elana Varon of Cochituate Media LLC for writing and research. The SAP Center for Business Insight is a program that supports the discovery and development of new research-based thinking to address the challenges of business and technology executives. 10 Inquiry: A New Vision for HR Management: The Workforce Ecosystem 2013 SAP AG or an SAP affiliate company. All rights reserved. NO. 33

1 Barbara Adachi, Michael Gretczko, and Bill Pelster, Human Capital Trends 2013: Leading Indicators (Deloitte, 2013), http://www.deloitte.com/view/ en_us/us/services/consulting/human-capital/human-capital-trends/ index.htm. 2 Gallup, State of the American Workplace: Employee Engagement Insights for U.S. Business Leaders (2013), http://www.gallup.com/ strategicconsulting/163007/state-american-workplace.aspx. 3 Peter Cappelli, Why Good People Can t Get Jobs: The Skills Gap and What Companies Can Do About It (Wharton Digital Press, 2012). 4 Alice Kwan, Neil Neveras, Jeff Schwartz, Bill Pelster, Robin Erickson, and Sarah Szpaichler, Talent 2020: Surveying the Talent Paradox from the Employee Perspective (Deloitte University Press, January 23, 2013), http://dupress.com/articles/talent-2020-surveying-the-talent-paradoxfrom-the-employee-perspective. 5 Lorrie Lykins, The Contingent Worker Debate, TrendWatcher, February 16, 2011, http://www.i4cp.com/trendwatchers/2011/02/16/the-contingentworker-debate. 6 Society for Human Resources Management, Challenges Facing HR Over the Next 10 Years (November 1, 2012), http://www.shrm.org/research/surveyfindings/articles/pages/ ChallengesFacingHROvertheNext10Years.aspx. 7 David Gartside, Yaarit Silverstone, Catherine Farley, and Susan M. Cantrell, Trends Reshaping the Future of HR: The Rise of the Extended Workforce (Accenture Institute for High Performance, 2013), http://www.accenture.com/sitecollectiondocuments/pdf/accenture- Future-of-HR-Rise-Extended-Workforce.pdf. 8 Knowledge@Wharton, Talent on Demand : Applying Supply Chain Management to People, February 28, 2008, http://knowledge.wharton. upenn.edu/article.cfm?articleid=1899. 9 Stephen Burks, Bo Cowgill, Mitchell Hoffman, and Michael Houseman, The Value of Hiring Through Referrals (Society of Labor Economists, April 24, 2013), http://sole-jole.org/13337.pdf. 10 The Economist, Robot Recruiters (April 6 2013), http://www.economist.com/news/business/21575820-how-softwarehelps-firms-hire-workers-more-efficiently-robot-recruiters. 11 Aberdeen Group, Driving a Blended Workforce Strategy: A Total Talent Approach, January 2013, http://www.randstadsourceright.com/thoughtleadership-downloads/driving-a-blended-workforce-strategy-a-total-talentapproach.pdf. 12 Cindy Waxer, 4 Points HR Needs to Know About Employment Law, Data Privacy and Security, DataInformed, March 25, 2013, http://data-informed.com/4-points-hr-needs-to-know-about-employmentlaw-data-privacy-and-security/. 13 Jenny Cermak and Monica McGurk, Putting a Value on Training, McKinsey Quarterly (July 2010), http://www.mckinsey.com/insights/organization/ putting_a_value_on_training. 14 Jeanne C. Meister and Karie Willyerd, The 2020 Workplace: How Innovative Companies Attract, Develop, and Keep Tomorrow s Employees Today (Harper Collins, 2010), http://www.harpercollins.com/books/ 2020-Workplace/?isbn=9780061763274. 15 Laurie Bassi and Daniel McMurrer, How s Your Return on People? Harvard Business Review (March 2004), http://hbr.org/2004/03/hows-yourreturn-on-people/ar/1. 16 Institute for Corporate Productivity, Building a Change-Ready Organization: Critical Human Capital Issues 2013 (2013), http://go.i4cp.com/criticalissues-2013-report. 2013 SAP AG or an SAP affiliate company. All rights reserved. No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed without prior notice. Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors. National product specifications may vary. These materials are provided by SAP AG and its affiliated companies ( SAP Group ) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty. SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Please see http://www.sap.com/corporate-en/legal/copyright/index.epx#trademark for additional trademark information and notices. SAP Center for Business Insight Brief Q&A Case Study Inquiry E-Book 11