The costliest mistake you can make in Talent Management

Talent Management is difficult to get right. Let’s be sure about that. In fact, most talent programs have a negative ROI if properly measured. However, there is one mistake you should avoid at all costs as it will lead to high turnover of talents (and a negative return on investment). That mistake is not having a plan for what happens with the talents after the program ends. And that plan should be made and communicated up front.

The unique thing about Talent Management – and Human Capital in general – is that if an employee decides to leave the company, he (or she) will then take the entire investment with him. In other words the cost of a talent leaving is not only loss of productivity, cost of rehire etc. but also the money spent on developing that person.

A key objective of a talent program must therefore be to ensure that talents stay after the talent program as this is the only way to get a return on the program. When the talent programs is ongoing talent turnover decline. But what many fail to understand is, that talent turnover often goes up when the program finishes. And sometimes quite a lot.

Why is that?

Evidence suggests that frustration with advancement opportunities is among the most important factors . Generally, the single biggest reason for why talents leave  organisations is lack of advancement and development according to a 2006 Global Workforce Study by Tower Watson.

During the program, talents will – rightly or wrongly – expect that something will happen afterwards; a promotion, a big assignment, an outpost or something new. If they are ‘leadership talents’ they will expect to move up the organisation. If they are ‘specialist talents’ they will expect being offered better and more prestigious projects to work on after the program.

Studies suggest that the talent turnover can be halved post the program if proper post-program plans are in place. Don’t make the biggest mistake of not addressing this up front.

Why Talent Management no longer matters

Since McKinsey in 1998 published their article on “The War For Talents” it has been widely accepted that Talent Management should be a key priority for any HR department. Actually, make that for any top management team in the world. Indeed when surveyed “Talent Management” or “Attracting the right talent” always come up as one of the top three priorities for US and European CEO’s.

So, is that how it should be? Well, I think it is. But let’s look at the convincing case there actually is for why talent management is not that important. It goes something like this:

Between 1980-2000 the use of big Talent Management programs declined rapidly. This was mostly evident in companies well-known for their extensive programs such as AT&T, IBM, Citi Group etc. Why? There are many reasons for that. A few are:

1. Loyalty fell and therefore the turnover of key employees rose. When they leave they take the investment with them.
2. Companies went through so many restructurings that talents were not so much in demand.
3. Global competition made talent forecast very uncertain and long development programs either yielded too few or too many talents.
4. The high unemployment rate in the 80′s meant that it was easy to buy cheap young talent – there were so many available talents around and it was therefore cheaper to buy than to make.

The first three points are still relevant now – perhaps more than ever. So consider the fourth. Look at the chart below. Unemployment rate in US is now at 9%-10% but the youth unemployment rates are sky high- almost at 20%! And many of these are well-educated. The same is true in Europe – in Spain the rate is above 40%!

Perhaps companies do not need to invest in expensive Talent Management programs. There is plenty of well-educated young people around who can be hired for less.

5 ways to improve the ROI on Talent Management

Lets face it – most companies don’t measure ROI on their Talent Management programs. Perhaps this is because they don’t know how to, that they know the result will be scary (very negative) or just because they don’t believe in measuring HR. For whatever reason, they are starting from way behind the starting line.

ROI is a simple tool – and also a tool to be used carefully as it has many pitfalls. However, at is core it has two components; benefits and costs. To improve ROI you need to focus on both. These five suggestions will improve your ROI by looking at how to improve the benefits (4 & 5) and how to lower the costs (1, 2 & 3).

1. Improve your development program. You can create value by finding ways to lower the cost of your development program associated with the talent program without affecting the benefit of the program. This can successfully be done using e-learning, coaching and action learning which all have significant lower costs than big  classroom-based learning programs. While no program should be based solely on any of the above mentioned, the cost of most programs can be lowered without compromising the benefits using these types of components.
2. Shorten your program. Going back in the 60′s it was not unusual to find talent programs which had a duration of three years or even more. This has proved to be wasteful for two reasons; firstly, the uncertainty of forecast of talent needs are too high over such a period. You end up with more talent or competencies you don’t need – and that is a serious waste of money. The second reason is that the added benefits of the final year has proved to be lower than its costs. It is simply not worth it. Best to keep programs at a length of 1½ years instead.
3. Create more effective assessment centers (AC’s). AC’s are used to select and develop talent. AC has been under a lot of pressure for two reasons; the validity is often very low and they cost a lot. While both issues are real it is possible to make AC’s valid and cost effective. The difference in ROI between a standard AC and a best practice AC is significant. Make the effort to make a good one.
4. Add external candidates to your program. Fact is that you will not have enough talent in-house to meet your need for growth and innovation. Instead of spending good money on people who will not be able to develop at the required speed or achieving the right level of competencies you should acquire them from outside. This is cheaper and earns a better return.
5. Have a plan for what happens after the program. The single biggest reason for why talents leave after having been through a talent program is that they are frustrated of not getting moved up in the organization or being offered better projects to work on after the program. This must be addressed up front. Studies suggest that the talent turnover can be halved post the program if proper post-program plans are in place.

The first step is however to measure your return on your Talent Management program. This is not difficult, but requires a solid process based upon best practice. Once this has been done then you can find ways to improve your return. The above five categories will get you a long way.

Good luck.

Why most succession plans don’t add any value

At its very core, the problem is that most succession plans are never used. And if not used, it is hardly a controversial to say, that they don’t add value. Many large international companies spend much time and resources on developing a complete success planning program, which intends to identify a person who will take over if the executive is hit by a bus or suddenly leaves the company. I have never actually heard of the famous bus incident so I guess it is for when executives get fired or leave.

There is today very little evidence to support the view that it adds value to have succession plans for top management level, however some case studies and data suggest that this is more valuable for some middle-managers and many specialists. Maybe that’s where the focus should be.

So what to do for the succession plans to add value?

1. Succession planning works best in organisations where there is little change and a high degree of predictability. No wonder then that the term originates from the military. This is true for some organisations but for most the reality is that they experience so much change, re-organization and lay-offs that succession makes no sense.
2. The quality of the successors must be very good, which means that a constant gab-analysis and gab-closing exercise must take place. This development project is valid when a successor is needed but wasteful when it is not.
3. Management must be committed to use the identified successor (which frankly is not the case today, as highlighted in a recent McKinsey study of talent management).

One possible solution to lower cost and improve returns would be to make a Just In Time Succession Plan. When a job is open, find out who is the most suitable and let that person take the role. If any development is needed post hire then spend the money there.

Finally there is the option of asking a executive search company to always have a list of five candidates ready for all of the top management positions and review the list with the search company on a regular basis.

P.S. I would encourage you to read chapter 5 in “Talent on Demand” by Peter Cappelli for more on this subject.

Do talents or systems make the difference?

What makes the difference; talents or systems? If you take, say, a great soccer player like Lionel Messi and put him into an inferior team will he do well and make a difference to that team or is it the fact that he plays for Barcelona that what makes him great? This question – formulated slightly different – is the crux of a debate which has been going on for a while. Lets look at the two arguments;

Malcom Gladwell (who wrote ‘Blink‘, ‘The Tipping Point‘ and ‘Outliers‘) wrote that “The talent myth assumes that people make organisations smart. More often than not, it’s the other way round” in a seminal article in the New Yorker in 2002. This is supported in Boris Groysberg’s ‘Chasing Stars: The Myth of Talent and the Portability of Performance‘. In this book Boris describes analysis of the careers of over 1,000 ‘star analysts’ at 78 Wall Street  investment banks, and 20,000 non-star analysts at 400 investment banks. His startling finding: star analysts who change firms suffer an immediate and lasting decline in performance. The conclusion, in their view, is that the systems, culture, resources and teamwork of the company matters more than the talent. In other words performance may be more firm-specific than previously thought.

On the other side stands a lot of the traditional management literature, which argues that attracting and retaining the best people is the most important thing to get right. Talent matters a lot. This includes authors such as Jim Collins (notably ‘Build to Last‘ and ‘From Good to Great‘) who aruges that getting the right people on the bus and putting them in the right seats are more important than finding out where to go (talent matters more than strategy).

I believe that both arguments are right to some degree but not in their entirety. I am not sure that any of the perspectives are very productive in their purest sense. That talented people should be the answer to everything is clearly too simple. At the same time I don’t think it makes much sense to say that some people are not better skilled to do a job better than others and having a lot of those skilled people in the most important job functions makes a difference. Perhaps Malcolm Gladwell and Boris Groysberg have a point about not relying too much on star performers and not believing that they are soly the reason for the company’s success. However their argument should not be taken too far. Talents matters a great deal. Just ask Barcelona FC.

Human Capital move stock prices

I went to a very interesting event in London a few weeks ago. It was arranged by Human Potential Accounting and the event was titled “The Future of Investment: Human Capital”. A panel composed of people from different parts of the investment community – private equity, regulators, pension funds, investment banks etc. – discussed how much they use Human Capital when assessing the value of companies. The topic is ever relevant and interesting.

When I think back upon my time as financial analyst in London, I remember that a lot of our valuations was based upon gut feeling. This gut feeling (should PE be 15x or 17x) had a great impact on valuations and much of it came down to Human Capital. It was soft, people stuff such as ‘ability to execute’, ‘trust in management’, ‘aligned organization’, ‘ability to change’ and ‘ability to innovate’. I never tried to put an exact value on these things, but I would write things such as “I do not believe the management will be able to deliver on this strategy” or something like that.

About 80% of the market value of a stock is not accounted for by the tangible assets on the balance sheet. In the early 80′s this figure was closer to 40%. So clearly the intangible value matters more today that they did 30 years ago. Human Capital is without doubt one of the most important intangible assets.

So when people ask “is Human Capital actively used in valuing stocks today” the answer is both ‘yes’ and ‘no’. No, I never see an explicit value put on any parts of Human Capital and it is never capitalised on the balance sheet. But ‘yes’, people issues matters a lot when investors, analysts and companies assess the market value of a company.

Should Human Capital be fully capitalized on the Balance Sheet?

Book value accounts for about 20% of a company’s market value today. The rest – 80% – is down to immaterial ‘assets’. This makes valuing companies very difficult indeed.

There are many good reasons why book value always will be lower than market value. However one way to close this gap – and thereby making the value more transparent – is to capitalize more of the immaterial value. This could be ‘Brand Value’, ‘Customer Loyalty’ or ‘Innovation’. All of these things obviously makes a company worth more. However, one candidate stand out to me – people or ‘Human Capital’.

Why ‘Human Capital’ is a strong candidate is because it accounts for the bulk of the cost for most companies today. For some it is about 75% of total costs. It is also universally recognised, that people and their ability to perform, is the single most critical reason behind value creation today.

How practically this should be done is quite difficult to say. One way is to capitalise the total cost of the people including wages, pension, recruitment, training etc. But many questions are difficult: Should people be depreciated? If you spend money training them, should this be capitalised as any other investment? What happens when somebody leaves – should a cost be booked on the income statement? Can you ‘buy’ people below their value and should this be a gain on the income statement? How do you measure the value of people (if you don’t just use the cost base)? Some people are clearly worth different to the company despite perhaps getting the same pay – how should that be accounted for?

Perhaps these questions illustrates why Human Capital is not capitalised today. It is simply too difficult to find a meaningful way forward. But I would like to see a good, public debate about this. Perhaps there is a way?

ROI is a dangerous tool – here is how to use it

ROI (Return On Investment) has become the tool which HR increasingly use to show that they are adding value to the company’s bottom line. And rightly so. HR has the potential to create a lot of value to a company – also Shareholder Value. And this value  should be shown and highlighted.

ROI is a very simple tool. Too simple in many ways. The calculations is:  (return-investment)/investment. The return is the monetary gain from a HR activity and the investment is the full all-inclusive cost of the activity.

Despite the obvious problems in actually measuring the financial benefits of say a leadership development program, the ROI calculation is something  in itself to be careful about.

When I worked as a financial analyst, we didn’t use ROI that much. We used more ‘sophisticated’ metrics such as Enterprise Value metrics, ROIC (Return On Invested Capital), RoOFCF (Return on Operating Free Cash Flow), CRONCI (Cash Return On Net Capital Invested). What is common about all these ratios is that they recognise that ‘return’ and ‘investment’ is something quite complex.

When I still believe that ROI has a lot offer for HR executives it is because that when used right, it has a lot to offer.

The advantages with ROI are:

• Easy to understand
• Focuses on input and output of an HR activity
• Show the bottom-line effect
• Gives HR a language to talk to top management (and CFO in particular)
• Makes it possible to make better HR investment decisions
• Connects well with HR Balance Score Card
• Potentially show the important assumptions behind the activity

The weaknesses of ROI are:

• It is very sensitive to a few assumptions (in particular about productivity gains)
• Reduces complex things such as people and leadership skills to simple causal relationship and a single number
• Difficult to see the most important assumptions behind the calculation

So when you use ROI to show the financial value of your HR activities please remember that it is a very simple tool which should be used very careful. When I help HR executives to use ROI in their business I always emphasize the importance of process, structure, explicit assumptions and base line data.

Good luck

Wrong assumptions lead to bad decisions

Human Capital is the ‘hard’ side of Human Resources. It is about making strategic decisions, measuring the impact and basing decisions upon ‘objective’ and measureable data. One of the most important things for a Human Capital Manager is therefore to get quality data. Without that you cannot make good decisions.

Daryl Morey writes on HBR’s blog that ‘Success Comes From Better Data, Not Better Analysis’. He argues that the right data is more important that hiring good analysts, who can interpret this data. He writes “Raw numbers, not the people and programs that attempt to make sense of them. Many organizations have spent the last few years hiring top analysts based on the belief that they create differentiation….But…real advantage comes from unique data that no one else has”.

I only partly agree with Daryl. It is definitely true that most HR managers are basing their decisions on poor and questionable data and even more questionable reasons for using that data. Poorly formulated satisfaction surveys are often the only data upon which expensive programs are initiated. Most HR departments, which I speak with, will benefit greatly from having better data.

On the other hand I believe that some of the underlying assumptions on which many HR managers base their decisions are also poor.  That many mistake correlations with causality and therefore don’t understand what drives what. The connection between Job Satisfaction and Productivity is a case in point. Better data will not help you with that. You will just have better data to make the same mistakes. The shift to Human Capital Management should also be about questioning some of the underlying assumptions in Human Resource Management.

Human Capital Management is about making better HR based upon strategic and measurable initiatives. This requires much more data of significant higher quality AND to challenge existing underlying assumptions behind how they should be interpreted.

HR due diligence just got a lot harder

 M&A due diligence is important. Very important. Dependent on which study you read, 60%-85% of all mergers and take-overs do not deliver the financial and/or strategic benefit it was expected. The due diligence process is supposed to assess if the deal makes strategic and financial sense AND if the two companies together can execute the process so the benefits can be reaped. And if it doesn’t – then to cancel the deal. Well, as the numbers show – it does seem to work.

The financial due diligence is often rigours and plays a major part of the overall due diligence process. In many cases it is the only due diligence which is really performed.  But judging by the failure rate of M&A’s – it does not appear to be enough.

How can the success of M&A be improved? Answer: HR due diligence must play a bigger role than they do today.

Four things will improve the M&A success rate:

1. HR must be involved earlier. HR is usually only involved in the second half of the pre-deal stage. Usually after the financial and legal due diligence.  That’s too late. HR should be involved at the first stage of a deal.
2. HR due diligence must go deeper into the organization. Many HR assessments only deal with the top management level. Many talents and key people are however based further down the organisation. Also, many practical  integration problems occur at the middle-manager level. This level should also be included.
3. HR due diligence must be more comprehensive. Many assessments are limited to a few superficial HR metrics (number of employees, union membership, staff turnover, pension liabilities, compensation plans etc.). This is partly because HR is involved too late. Becoming more comprehensive also means adding more types of data, which could include behavioural data, cultural information and engagement levels.
4. HR must use more professional methods and processes. A proper, professional and value-added HR  due diligence must be based upon a strict and rigorous process where relevant parts of the company is x-rayed, objectively measured and assess in specific relation to being able to execute on the successful integration of the two companies. Nothing more. Nothing less.