Talent on Demand

Business Week

January 27, 2009

by Marshall Goldsmith

Finding, retaining, and developing talent is one of the toughest business challenges executives face. It’s made even tougher because many of the practices executives use don’t work in today’s uncertain environment. With the absence of job security and the likelihood of lifetime employment with one company a thing of the past, the open labor market means you may be investing in talented people who will leave your firm for a competitor. I invited my friend Peter Cappelli, a Wharton professor, author of Talent on Demand: Managing Talent in an Age of Uncertainty, and a recognized world authority on human capital, to discuss his new approach to talent management. Edited excerpts of our conversation follow:

MG: First, what is talent management?

PC: A simple definition is anticipating the needs for talent and setting out a plan to meet those needs. While most observers think of “talent” as referring to managerial jobs, actually, any positions that are hard to fill or crucial to the organization count as “talent.”

What’s wrong with the way we do talent management now?

Survey evidence suggests that most companies no longer do any talent management. A generation ago, 96% of large employers in the U.S. had dedicated departments to do workforce planning, according to a Conference Board study done in 1966. Now, less than a third even attempt to forecast demand for talent. Some estimates suggest that less than one in five companies attempt to plan for internal succession.

The companies that attempt to do talent management in a sophisticated way use old-fashioned models from the 1950s that assume we know with great certainty what the demands will be in the future.

These models require the ability to plan accurately well into the future. The estimates of demand fall apart because the business environment is so uncertain. Our internal “pipelines” of talent also prove misleading because of unpredictable attrition. The talent plans then turn out to be wrong, in that employers end up with more managers or other kinds of talent than they need, leading to layoffs; in other cases they end up with not enough of the skills they need, causing work to be turned away.

So, what do we do instead?

The problem for talent management is to deal with and manage that uncertainty. We do this by adapting techniques that are already well known from supply-chain management. To begin, we ask, what happens when our forecasts for demand turn out to be wrong, as they almost always will? What does it cost us? We can be wrong in two ways: Actual demand is greater than our forecast, and we have a shortage of talent; or actual demand is less than we thought, and we have a surplus of talent. What will it cost us in each case?

The idea of having a “deep bench” of talent costs us money. A deep bench is inventory. And human capital is the most expensive form of inventory … we have to keep paying while people are “sitting on the bench,” and the most ambitious ones are likely to leave, taking our investments in them.

Falling short on talent, on the other hand, can be offset in most cases by outside hiring, contracting, or temp workers. Once we know which cost is greater, then we plan accordingly. If our best guess is that we will need 100 additional middle managers, and we think the costs of going long are greater than the costs of going short, then we should try to develop fewer than 100 middle managers … say, 90. And if it turns out that we fall short, then we use outside hiring to make up the gap. This allows us to respond to the uncertainty in ways that don’t break the bank.

The biggest concern with development seems to be attrition … that we invest in employees and they leave.

The problem from the employer side is that they advance the investment and then hope for a return. But employees can take this investment and look for jobs elsewhere at higher wages. So the employers end up paying for this twice … first the investments, then higher wages. There are many ways to adapt to this problem, but perhaps the most creative is to find ways to get employees to share the costs of development.

Many companies have started doing this by asking for workers to volunteer for additional developmental assignments. But they have to keep doing their regular job in the process. So the development is essentially done on the employee’s dime.

What do the employees get out of this new approach?

The ability to quit and find a job elsewhere gives employees options that they didn’t have during the lifetime employment period. In order to keep employees from leaving, most employers give them more say about managing their careers.

Virtually every company now has electronic job boards that create something like an internal marketplace for talent. We’re moving toward [a system] where employees and their employers shop for talent. Balancing the interests of employees and their employers is the key, and a number of companies have arrangements to negotiate compromises.

This has been fascinating, Peter. Thank you! I love to point my readers to new approaches to the significant challenges they face today, such as talent management.

Readers, as always, I would love comments from you. Peter can be reached at Cappelli@Wharton.UPenn.edu