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Why people are the critical component to achieving your strategy.

Who will you need to succeed?

Who will you need to succeed?ii

©2013 Hay Group. All rights reserved

A fresh look at human capital

Most businesses readily say that people are their most important asset. But how many genuinely match these words with action?

Put in purely financial terms, if a $1 bn company spends 20 percent of turnover on people each year and has a typical churn of 10 percent, that’s an investment of $20 million each year: a cumulative investment of $100 million every five years.

What board would not expect a clear picture of the return on that investment or indeed a good understanding of what it would get for that level of annual expenditure?

If organisations truly treated their employees as assets, as ’human capital’ – identifying their value, return and risk, and invested more in them – they would unlock better, sustained business performance.

In ‘Who will you need to succeed?’ we explain a new approach to workforce planning which will help businesses to thrive in a world that has become too complex for ‘business as usual.’

1

Contents

Foreword 3

Who will you need to succeed? 4

Start with strategy 8

Identify pivotal roles 10

Assess human capital risk 12

Conclusion: ask yourself the big questions 15

Who will you need to succeed?2


3

Foreword

Bill failed in Venezuela. His attempts to expand his company’s

operations into this new market ended in expensive failure –

all because of a language issue.

Bill’s specialist team of high potential executives from the Midwest was technically brilliant

but operationally naive. After a three-year delay in building a string of water sanitation plants,

the company stopped the project and retreated ignominiously. Internally, the fiasco was dubbed

the ‘Bay of Pigs’.

The problem was that no one had the words to describe the particular type of people Bill needed:

part salesperson, part ‘fixer’ and adept at making things happen in this very singular country.

If Bill had been able to articulate the ‘strategic capabilities’ needed to be successful in Venezuela,

he might have been more successful.

But the world of human capital lacks a language, just as it also lacks prominence in corporate

decision-making. I have listened to many investment committees discuss small acquisitions

in excruciating detail while making only passing reference to the huge amounts of money they

have invested in people. They take their employees for granted instead of treating them as

an essential capital base from which they should, and in fact must, earn a return. There needs

to be a language relating to people which enables decision making and effective investment.

Yet as Bill’s example shows, business failures are often to do with people, not strategy or technology.

Today, when business cycles are shorter, and markets more volatile and more global, planning

your workforce is more valuable than ever. If organisations can work out what capabilities they

need, now and in the future, they will give themselves the best chance of success.

Eric S. Pelletier | managing director | key clients Europe | Hay Group



Who will you need to succeed?

‘Business as usual’ is a thing of the past, so a strategic approach

to people planning is essential.

The world has become too complex for

business as usual.

In the life sciences sector, for example, it’s

no longer enough just to be good in your

therapeutic franchise. Tomorrow’s successful

companies will, for example, also have to

be skilled at unfamiliar technologies like

nanotechnology, as researchers start to see

the enormous potential for carbon nanotubes

in drug delivery. And regulators now want

such vast volumes of clinical trial data that

biotech and drug firms need people with

serious ‘big data’ analytic skills. This will also

support additional discovery. But universities

don’t produce people with the right mix of

pharmaceutical knowledge and analytic savvy.

The life sciences sector is typical of most

industries, which – in the face of rapid change –

are finding that they’re struggling to source

the right people and skills.

An explosion of complexity

At Hay Group we see companies facing issues

like this in our day-to-day work. A manufacturer

recently asked whether we could help train its

salesforce to sell MRI scanners. We looked

at the salesforce. And we looked at the

scanners. And we said… ‘no’. The sales process

demanded such a high level of technical

knowledge and contacts with specialists on

so many levels, from neurosurgeons to hospital

administrators, that it was simply impossible

to build the expertise needed. Our solution

was to develop the commercial skills of

a group of engineers in another division,

who were about to be made redundant and

turn them into salespeople. We couldn’t train

the salesforce to be engineers but we could

train the engineers to be salespeople.

The past 15 years have seen an explosion

of complexity as jobs demand skill sets that

education systems and company development

programs are simply not producing. It’s a far

cry from the old days of apprenticeships that

provided a reliable flow of talent for specific,

slow-changing trades.

It’s one of the key reasons why the Beveridge

Curve, which normally describes an inverse

relationship between unemployment and

vacancy rates, is behaving abnormally

and ticking up.

5

Q1 2008

Q4 2008

Q1 2009

Q4 2009

Q1 2011

Q4 2010

Q1 2010

2.2

2.0

1.8

1.6

1.4

1.2

1.0

6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5

Unemployment rate (%)

Va

can

cy r

ate

(%

)

Expected shape of the Beveridge Curve:

unemployment rate falls as vacancy

rate increases

Breakdown of the Beverid

ge Curve:

unemployment rate actually grows in

tandem with a ris

ing vacancy rate

Figure one: vacancies persist alongside high unemployment (EU27 Beveridge Curve 2008-2011)

In the EU, (see figure one), job vacancies persist

post high unemployment. Because jobs are

more complex, there’s not enough talent to

go round. This is a structural imbalance that

will not correct itself soon.

In the US, there are 23 million unemployed,

yet three million vacancies. This is the

’talent paradox’: a skills deficit in an era

of post-recession unemployment.

We couldn’t train the sales force to be engineers but we could train the engineers to be salespeople.

Source: ‘Turning the tide’ report. European Business Summit 2012 research study



The race for growth in unfamiliar markets

However it’s not just jobs that are becoming

more complex. The very business of growing,

expanding and marketing has changed

dramatically as companies are compelled

to find growth in new and unfamiliar markets.

‘Business as usual’ is becoming an outmoded idea.

Recently, a multinational approached us

for advice around its plan to hire 25,000

salespeople to spearhead its China strategy,

a move that financial markets had been

clamouring for.

3 x 25,000

First, we made the point that the company

would need a pool of 75,000 candidates in

order to be selective.

2 x 75,000

But in such a high-growth market, around 50

percent of the people you hire and train are likely

to be poached by competitors within two years.

7 x 150,000

So the company would need a pool of 150,000

candidates to allow for this. (And it should also

make provision for doubling the salaries of the

people who weren’t poached after two years).

Finally we pointed out that there are 5-10

competing multinationals trying to follow the

same strategy. So to be on the safe side,

our client would need half a million to

a million candidates, a vast pool even by

Chinese standards.

In sum: the structure and limitations of the

Chinese job market meant this company’s

strategy would not be realised because

it hadn’t first taken a strategic look at the

skills needed and the talent pool available.

So the solution was to use acquisitions that

would bring in pools of talent that would

speed up strategy implementation.

The retail sector faces similar issues. When

a US ‘big-box’ brand planned to target the

Indian market for the first time, it needed to

take into account a bewildering array of factors

that meant its usual deployment strategy and

people plan would need a radical overhaul.

Logistics are different in a country without a

freeway network; India does not have a ‘service

culture’ like the US; customers living under

the caste system are not yet acclimatised to

‘under one roof’ shopping and it’s not a buyer’s

market for talent. Only by carefully redesigning

its business model to local circumstances and

tweaking its workforce plan accordingly did the

company stand any chance of making headway.

What these stories illustrate most strongly

is the strategic importance of talent – and

how much more important it is today to

make sure you have the talent needed to

deliver your strategy.

7

More than just numbers

It’s a simple point, but it bears repeating: you

can’t build a business without the right people.

So how do you make sure you have them, and

in the right place, at the right time? Traditional

methods of workforce planning are headcount-

based and assume business continuity. This

is limiting: it does not take into account the

change in skills needed to deal with strategic

disruptions to the business. As we saw in the

China example, simply taking a spreadsheet

and projecting numbers doesn’t work. And the

life sciences and manufacturing stories illustrate

the importance of forecasting the quality of

workforce you will need, as well as its quantity.

Examples like this also show that workforce

planning needs to be something in which the

whole business is involved: HR, strategy and

marketing, not just finance. A vivid illustration

of what happens when it’s just left to the

numbers people is provided by a European

bank, which had to cut 200 senior people to

improve its cost position. It offered generous

voluntary redundancy packages... and then...

its best people walked. Within six months it had

to re-hire 140 people. In this case, if the bank

had thought first about who it needed to keep,

it could have avoided this cost and trouble,

and held on to the people it wanted to retain.

Strategic workforce planning

With its roots in strategy, a strategic approach

to workforce planning ensures organisations

have the skills in place to operate successfully

in fast-changing markets.

Effective strategic workforce planning is about

more than just numbers. It is rooted in the

strategy of the organisation and, through

a series of stages, identifies the strategic

capability needed to deliver it.

Effective strategic workforce planning is about more that just numbers. It is rooted in the strategy of the organisation and, through a series of stages, clearly identifies the strategic capability needed to deliver it.

There isn’t a language relating to strategic workforce planning, yet. However Hay Group

proposes a model which takes as its starting point the strategy of the organisation.

Riskassessment

Fiverights

Pivotalroles

Strategiccapabilities

BusinessmodelStrategy



Based on your strategy and business model, you can identify the

‘strategic capabilities’ that help define the human capital you

need to deliver successfully. These are both business- and industry-

specific. Companies need a mix of the two in order to succeed.

‘Business-specific’ capabilities are those capabilities essential to the quality of business

management regardless of the sector or industry. The table on the facing page gives examples

of industry specific capability issues experienced by some sectors globally. They include qualities

like operational agility, customer centricity and innovation. As the chart [below] shows, high

performing companies are stronger in these important business-specific areas than their peers.

Bas

e p

oin

ts H

P v

s. G

I

Operational excellence

Percentage by which high-performing (HP) companies outperform

general industry (GI) on business-specific capabilities.19.6%

9.8%

12.4%

Customer centricity Innovation Source: Hay Group research

Figure two: high performing companies are better at business-specific capabilities

Start with strategy

‘Industry-specific’ capabilities vary widely and evolve rapidly. They are the skills a company needs

to operate within a specific sector. The table opposite illustrates how industry developments

constantly change and refine the industry-specific skills needed.

The retail case study [in figure three] illustrates how strength in industry-specific capabilities has

a dramatic effect on corporate performance.

9

Sector Typical industry-specific capability issues across mature and fast

growth markets

Oil and gas There is a growing shortage of geotechnical and petrochemical skills. This

is exacerbated by an aging workforce and a highly competitive recruitment

market. Growth in non-conventional oil and gas complicates the situation.

Finance A wave of regulatory reform and reorganisation is driving demand in areas

such as risk management and financial analysis. The fast shift towards mobile/

Internet banking reinforces the importance of technology.

Energy New forms of energy production and new regulatory frameworks create

a need for joint ventures and new skills associated with smart grids,

carbon capture and renewables.

Telecommunications The rapid shift from 3G to 4G technology needs expertise in areas such as

network and radio frequency engineering. Content is becoming critical.

Engineering based

industries

Industries such as rail and aerospace have seen a shift higher up the value

chain, demanding greater systems engineering and design capability as

lower-value work is outsourced and offshored.

Healthcare and life

sciences

An aging population and the exploding pace of research and technological

change are driving a shift in the clinical and scientific skills needed. There

is also a growing emphasis on delivering value for customers and patients.

Consumer goods There is a move from mature to emerging markets to generate growth

and margin. A critical success factor is whether companies can mobilise

or recruit the right skills in these parts of the world.

Over the past five years, this retailer has:

n Grown sales at a 7.6 percent average

annual rate

n Increased its share price by a total of

47.5 percent

n Grown net income at an 11.5 percent

average annual rate

Over the past five years, this retailer has:

n Entered into bankruptcy, emerging

only recently

n Reduced net income at an average

44 percent per annum

n Closed over 51 percent of its stores

Figure three: Retail case study - the importance of industry-specific capabilities

Capabilities

Strategy and planning

Pricing

Data, insights and decision support tools

Promotions Catalogue and

own label

Ranging and

space

Suppliers and

teams

Capabilities

Strategy and planning

Pricing

Data, insights and decision support tools

Promotions Catalogue and

own label

Ranging and

space

Suppliers and

teams

A leading US retailer A struggling US retailer



The role of geologist is a pivotal role for oil

firms, the role of accountant is not.

Pivotal roles need not be high-level positions.

For example in the dairy industry, production

experts are likely to be first line supervisors.

Following an unsuccessful foray into Asia,

a European dairy firm had made many of its

production experts redundant. As a result,

the lack of a sufficient number of people with

those pivotal production skills, as well as the

time required to re-build them had become

a major barrier to expansion into Africa.

The focus on pivotal roles is a key difference

between traditional workforce planning –

which tries to project headcount into the

future and is often driven by the finance

function – and strategic workforce planning,

which focuses on strategic capabilities.

The ‘five rights’

Identifying strategic capabilities and pivotal roles

allow you to determine the ‘five rights’ of your

workforce. These are:

1. Right size: the right number of people in

the right roles, where they spend the right

amount of time to achieve specific outcomes

2. Right skills: an understanding of any gaps

between skills needed and skills required –

as in our MRI scanner salesforce example

3. Right shape: the right balance of leaders,

professionals to administrators and juniors

to seniors. (For Steve Jobs at Apple, the

right shape was a workforce comprised

entirely of highly educated people, with

no ‘blue collar’ posts, because he wanted

to focus the company on technology,

design and marketing)

4. Right location: making sure there is a

‘critical mass’ of people in the right locations

to meet the current and future workload

(people are less interchangeable than

finance would like to think)

5. Right cost: achieving all of the above

cost-efficiently and driving higher levels

of productivity

Identify your pivotal roles

The strategic approach goes on to identify ‘pivotal roles’ – jobs

that are tied directly to the successful implementation of strategy.

Without pivotal roles, the business model cannot function.

The focus on pivotal roles is a key difference between traditional workforce planning and strategic workforce planning.

11

From strategic capabilities to a skill map

Identifying pivotal roles enables you to build a skill map that visualises the type of skills needed

to execute the strategy of your business. It will help identify those skills that are critical to the

sustainability of your business – your core skills. They will be the scarce but critical skills you will

need to invest in over time and build, versus those which you can afford to either buy in, as and

when required, and those that can even be outsourced.

As the map below shows, it also can help you start to create the language you need to describe

these skills.

In this example, the skills required to successfully

run the clinical trials operations of a major

pharmaceutical company are plotted in terms

of their intensity i.e. how critical they are to the

activity. They represent a combination of:

n highly technical, knowledge-based skills

such as clinical expertise and metadata and

technology,

n functional skills such as investigator selection

n external partnership management

n soft skills such as quality mindset.

In this case, a quality mindset was deemed

critical, as the company had suffered a string

of quality failures in clinical trials that led to

expensive drug recalls.

The skill map also helps the company consider

which skills were critical (core) and should be

maintained in-house against those that could

be outsourced or just purchased.

This process allows for the dynamic redesign

of the organisation, focused on strategic

capabilities.

The need for a language of human capital

Business concepts only really take hold when they have a ‘language’ with which to talk about

them. Accounting, for example, got its language in the 15th century, when Franciscan monk

Luca Pacioli published a work that described the double-entry bookkeeping that is still practised

today, and allowed for the creation of the Lombard banks. Human capital, however, still lacks

an enduring language that accurately describes all its facets. How would we define the

leadership skill set that is essential to help businesses change? Or the value of people without

whose accumulated knowledge a business would falter? When terms describing these concepts

can be exchanged around the watercooler, we’ll know human capital’s language has arrived.

10

9

8

7

6

5

4

3

2

1

0

Regulatory compliance intelligence

Influential partnerships

Buy

Outsource

Core

Clinical expertise

Empowered decisionmaking

External partnershipmanagement

Patient recruitment

Investigator selection

Risk-based monitoring

Metadata andtechnology competence

Lean thinking

Quality mindset

Innovation

Figure four: mapping the skills for the clinical trials department of a pharmaceutical company



Assess human capital risk

Finally, strategic workforce planning looks at the human capital

risks, just as a business would for any other strategic asset. A good

illustration of this is work we undertook with the regulatory affairs

department of a pharmaceutical company.

Following a merger, the department found itself

with a pipeline full of compounds at an early

stage of development, but a workforce with

many people specialised in later development

phases. The immediate solution appeared

to be to make people redundant and to use

contractors, but this would be expensive and

result in a loss of in-house capability. By looking

carefully at the roles the department would

need over a five-year period, the company

was able to mitigate these risks, creating a

plan that transitioned its workforce, avoided

redundancies and built skills in-house. A side

benefit was improved productivity through

better allocation of people.

Risk management is all about making sure that

your workforce exhibits necessary behaviours,

for example the right collaborative skills.

There’s a well-tested ‘fishing game’ business

exercise that tests for teamwork and

collaboration. Individual participants can

score well by getting and trading big catches

early, but by doing so they quickly deplete

the pond and destroy the resources available.

Only by planning and collaborating can players

maintain a sustainable supply of food. When

Hay Group ran this simulation with futures

traders at a major bank, the resource-depletion

scenario resulted several times before players

realised they needed to anticipate risk more,

and team up effectively. In sum, they needed

to accept lower personal return to ensure

overall sustainability. In an era of rogue traders,

this lack of risk aversion is a major issue that

needs to be contained.

Risk management: a 2,500 year-old concept that’s still rarely applied to people

The concept of risk mitigation in business goes back thousands of years to the ancient

Greeks. Their merchants were keenly aware that the sinking of a cargo ship could mean

instant and complete financial ruin. To protect against this, ships carried cargos owned

by several different people. With their loads spread across multiple vessels, merchants

were protected against catastrophe. Similar techniques are of course commonplace in

financial markets today – indeed they are the entire basis of the reinsurance industry.

But they are rarely if ever used in relation to human capital. With strategic capabilities

so critical to business success today, organisations have much to gain from understanding

and managing risk associated with human capital as they would other precious assets.

13

An intriguing aspect of combining the skills

map with the risk assessment of workforce

is the ability to phase large transformation

programs. Defining your skills map for today

and the future will show how you can migrate

your employee population to those critical

skills. This is the issue facing many telcos.

As the skills map shows, they have transformed

dramatically in just 20 years. In the 1990s they

were still state-owned and focused on admin and

network technology. Ten years later they were

developing mobile technology and discovering

the importance of client service. Today, they have

realised that content will drive their business.

Admin

Cli

en

ts

Co

nte

nt

Network tech

1990

Admin

Cli

en

ts

Co

nte

nt

Network tech

2000

Admin

Cli

en

ts

Co

nte

nt

Network tech

2010

Figure five: the pace of change – the telecoms skills map 1990-2010

Required skills have changed dramatically in just 20 years.

15

So ask yourself the following questions about the human capital required for your next big investment.

n What skills will be required to support your strategy?

n Can the people allocated to this strategy be migrated to the roles and therefore the

skills required? At what speed? Is it a pace compatible with the strategy timeline?

n Where will you find the skills you lack?

n What are the risks for the strategy if you cannot find these skills?

Conclusion: ask yourself the big questions

Strategic workforce planning is about following through on the

time-honoured assertion: ’people are our most important asset‘.

As the examples we’ve discussed show, not every organisation matches these words with action.

If they did treat people like assets, they would be more mindful of their value, the risk associated

with them and the return that they bring to a business over time.

People due diligence

Put in pure financial terms, if a $1 bn company spends 20 percent of turnover on people each

year and has a typical churn of 10 percent, that’s a people investment of $20 million, every year:

a cumulative investment of $100 million over five years. For any other fixed asset investment

on that scale, the company would be likely to perform in-depth due diligence and planning.



Business and strategic failures are often

people-related. And these human stories

of failure are usually about skills deficits.

So if businesses invest in a strategic

approach to the skills they need, they

will minimise the risk of these failures.

Whenever an organisation is looking to

make significant change, strategic workforce

planning offers critical support to that process.

Mergers, for example, often falter because

the best people walk. This approach helps

make sure they are identified and stay.

During a restructure, it ensures cost cutting

can be accompanied by capability building.

And when, like Bill in Venezuela, companies

have aggressive growth plans, it can help

them confront and overcome the complexities

of globalisation.

The word ‘manage’ is becoming irrelevant

today. It implies a ‘steady state’ that no longer

exists. From the pharmaceutical company

branching into nanotechnology, to the big-box

retailer landing in a unfamiliar country, the

complexity of jobs, technologies and markets

mean that companies have no choice but to

transform the way they do business.

And the only way they can do this is by making

sure they have the strategic capabilities and

the right skills in place to thrive in a world that’s

become too complex for business as usual.

Business and strategic failures are often people-related. These human stories of failure are usually about skills deficits.


Hay Group is a global management consulting firm that works with

leaders to transform strategy into reality. We develop talent, organise

people to be more effective and motivate them to perform at their

best. Our focus is on making change happen and helping people and

organisations realise their potential.

We have over 3,000 employees working in 87 offices in 49 countries.

Our clients are from the private, public and not-for-profit sectors, across

every major industry. For more information please contact us on

1800 150 124 or email [email protected]

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