by Peter Cappelli
It’s a worldwide trend that has been under way for nearly a decade: Responsibility for talent management is shifting from HR to frontline executives. The transition is driven partly by cost cutting—head counts in HR departments fell sharply during the Great Recession—but it is also fueled by the recognition that many aspects of talent management are best handled by day-to-day managers. In a 2005 Australian study, 70% of respondents said that line managers had taken over many HR tasks in their firms during the previous five years. In a 2013 survey of UK companies, senior executives reported playing a much bigger role than HR departments in setting employees’ development goals. In the United States, 45% of the HR departments surveyed plan to restructure before the end of 2013, in part to reflect this trend. And research by CEB shows that when line managers, rather than HR, are responsible for recruiting, performance management, and retention, companies are 29% more successful at those tasks.
For many line managers, the shift presents challenges. Investments in human capital are highly uncertain; the returns are less predictable than those from, say, new machinery. Some talent management activities that worked well for decades no longer pay off. (See the sidebar “Stale Practices.”) And acquiring skills in this area can be difficult: Research suggests that some of the most widely held beliefs about managing people are misguided.
Executives newly responsible for talent management—and employers in general—may benefit from thinking about the questions below. The emerging best practices described will be familiar to most experienced HR professionals, but surprisingly few companies actually follow them.
1. What Are Our Talent Needs?
The first problem facing managers thinking about talent is the quality of information at their disposal. Consider other decisions—for example, which parts supplier to use. You would assess vendors and their prices and analyze the costs of carrying too much inventory or of running out. But when it comes to human capital decisions, your data are probably thin. Can you quickly answer these questions: Which schools, recruiters, and rival firms have provided your best employees? What are the costs of a vacant position, or of underused workers? What percentage of vacancies do you fill internally, and how does that square with your investments in development? What is the turnover rate for each job? What are the performance differences between your employees?
Some of what you think you know about these issues is probably wrong. For instance, one of the biggest misconceptions about managing talent is the belief that performance problems spring from individual failure. Research shows that the notion of “A” players is largely a myth. Most people aren’t innately good, average, or poor performers; the quality of their work depends in large part on context, including the systems and support around them. Harvard Business School’s Boris Groysberg has shown that hiring a rival firm’s star performer rarely works, because the support structure that helped her shine at that company doesn’t follow her to yours. Getting the best performance from employees often depends on putting them in the right job, with the right boss. Keep that in mind before investing money and energy to “upgrade” your talent.
2. How Should We Meet Our Talent Needs?
Often when managers think about obtaining talent, they think only about hiring. More than 60% of vacancies in large U.S. firms are now filled by outside hires, compared with just 10% a generation ago. This is partly owing to a cultural shift from lifelong employment to a more mobile workforce, but it also results from poor hiring decisions, lack of employee development, and the myth of the “A” player. In fact, there are three ways to meet talent needs. You can buy talent, by hiring from the outside. You can build it, by developing existing employees. Or you can borrow it, by engaging contractors or temporary workers.
How to choose? Start with costs. My Wharton colleague Matthew Bidwell studied executives recruited from the outside and ones promoted to the same jobs from within. It took three years for the outside hires to perform as well as the internal hires—but it took seven years for the pay of the internal hires to catch up with that of the outsiders. Consider, too, the direct costs of conducting an outside search and the indirect costs (low morale, high turnover) of bypassing internal candidates. It’s usually much more expensive to bring in talent. And it’s even more expensive to borrow it, because of agency fees and contractors’ steep profit margins.
Also weigh costs against risk. Developing existing employees can save money, but it’s a long-term bet, which increases the chances that something will go wrong. Will you still need the skills in which you’re training your employees five years hence? Are they on board for the long term? Hiring can give you someone who already has the right skills, but, as noted, the price tag is higher—and you’ll face a different sort of ramp-up time as the new worker adjusts to your company. Borrowing talent provides a just-in-time solution—most contract workers are practiced at getting up to speed and fitting in quickly—but do you want to pay the premium? If you’re fairly certain of your future needs and your ability to retain talent, a long-term bet makes sense. If that’s not the case, it’s worth spending more to reduce your risk.
Despite the cost of borrowed workers, few companies are strategic about their use—the median U.S. employer uses no temps or contractors, but in 5% of companies they make up 37% of the workforce. Some firms overestimate the flexibility these workers provide: Another study by Matthew Bidwell found that employers are slow to terminate temp workers when business turns down. Too often they contract these pricey outsiders for essential tasks rather than special projects—making them just as indispensable and hard to lay off as regular employees are.
3. How Can We Do a Better Job of Hiring?
Hiring may be the single hardest task in organizational life. The process has two distinct phases. The first is recruiting—attracting qualified candidates. Managers may be delighted if they’re besieged by applicants, taking it as a sign that their company is a desirable employer and that they’re doing a good job recruiting. But screening applicants is expensive, and a glut actually signals poor recruiting. Smart managers want a small pool of high-quality applicants. You can attain that by scaring away unsuitable candidates (by, say, listing stringent requirements) or communicating that your organization isn’t for everyone. (Specialist branches of the U.S. military, such as the Navy Seals, are masters of this tactic.) Good recruiters also find “passive” applicants—people who aren’t looking to change jobs but might consider it if approached.
The second phase is selection. This is hard too, because candidates may overstate their qualifications, and because many managers are poor at predicting who will be the best hire, especially for a job that requires significant experience; unless they have special training in the process, they may succumb to personal biases.
Fortunately, there’s a solution: Outsource the hiring function. Unless you regularly bring in a lot of people for the same types of jobs (as accounting and consulting firms do) or operate on a very large scale, you’ll probably get better results at lower cost if outside recruiters gather applicants and winnow the field to a small number from which you can select.
4. How Can We Develop Internal Talent?
A vicious cycle drives the reliance on external hires: Leaders think they can’t afford to groom employees for bigger roles because those employees might leave. And employees who aren’t groomed for bigger roles often do leave, reinforcing managers’ fears about the instability of their current employees.
But entire industries, including accounting and professional services, invest heavily in development, experience high turnover, and yet remain highly profitable. They can succeed with this model because classroom training is just a small part of their development process, most of which takes place as employees do real, billable work. The same model has long been used in carpentry and other trades, in the form of apprenticeships.
More companies should adopt the model. The skills in greatest demand—technical, sales, and executive skills—can be learned only on the job. Work-based learning is best done in stretch assignments, and it’s best managed by direct supervisors, who have the keenest sense of when an employee is ready for a new task and have ready access to appropriate project work. Learning by doing also eliminates the problem of front-loading investments in development and having to wait for returns (or having a rival poach your newly schooled employee and reap the benefits you paid for).
If your employees want classroom training, provide tuition reimbursement programs—the most underused development resource in business. The beauty of those programs is that employees attend classes after hours; companies incur no costs for lost work time. My research shows that employers who offer tuition reimbursement attract better applicants and have lower turnover than other firms.
5. How Can We Manage Employees’ Career Paths?
The single best way to retain valued employees is to give them better opportunities than they could find elsewhere. The problem is that promising a clear career path—“You’ll advance to this role in five years”—is impossible given all the uncertainties in business.
One way companies skirt the problem is by creating a transparent internal market for talent. They post any vacancies, and interested employees apply and make their case. The U.S. Navy’s Sea Warrior program goes even further, alerting individual sailors to suitable assignments and increasing compensation to spur applications for undesirable ones.
In the face of pressing day-to-day business demands, it can be tempting to put talent management at the bottom of your to-do list—an item you’ll get to someday. It’s true that focusing on it will increase your workload in the short run. But it can generate significant returns over the long term, by reducing under-the-radar problems that might undermine operational success. Asking (and answering) the questions above can decrease turnover among ambitious employees, minimize reliance on expensive outside hires or borrowed workers, and limit the number of employees who are disengaged from their jobs because they don’t see those jobs as leading to a better future.
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