Supply
TALENT INVENTORIES
a detailed record or database that summarizes each employee’s skills, competencies, and qualifications
In this example, the transition probabilities are based on the movements of employees for the year 2013 to 2014, but any meaningful period can be used. Some organizations face environments that are relatively stable, and will find that their transition probabilities stay relatively constant over time. In this case, more accurate transition analysis results can be obtained by looking at longer time frames. Other organizations will experience fluctuations in employee movements that make it difficult to identify relevant probabilities. In such a case, the most accurate transition analysis results are likely to come from transition probabilities derived from relatively short periods of a few months rather than a year or more. Because it’s hard to make accurate estimates based on small numbers, a transition analysis is most useful for larger employers. It is less effective for very small employers. Managers can also use their judgment to adjust the probabilities based on, say, the company’s growth rate. In this case, they would recalculate the employee deficits and surpluses upward or downward by the percentage growth rate they expect the business to experience. For example, if the workforce is expected to grow by 10 percent then the required employee levels for full- and part-time customer service representatives would be 440 and 165, respectively.
Like any forecasting technique, a transition analysis has some limitations.24 Multiple moves—for example, a person being promoted twice in the same period—cannot be accounted for. Thus, it is best to keep the time interval used to calculate the transition probabilities to two years or less. If any reason can be identified for why past patterns of employee movements will change, say, due to an expected pay increase or surge in employee retirements, these expectations should be factored into the transition probabilities. In some cases, past trends will not be as accurate as managers’ estimates are. This is particularly true if new strategic directions are being considered. Also, if only a few people moved into or out of a job the transition probability estimate might be unstable and subject to error. A transition analysis also assumes that all employees in a job have an equal probability of movement, which of course, isn’t likely to be the case.
Despite the limitations we’ve noted previously, a variety of organizations, including police departments, retail companies, high-tech companies, and the military successfully use the technique to forecast their internal labor supply. Like budgeting, forecasting is an imperfect science. Nonetheless, it is generally useful and certainly far better than doing nothing at all. Again, because of the uncertainties involved with forecasting, entering both conservative and optimistic estimates to produce a forecasted range is likely to be more useful than trying to pinpoint an estimate.
The primary limitation of all forecasting techniques is that they rely on historical patterns and activity levels. If the environment changes, past patterns may no longer hold. For example, if the unemployment rate is increasing, employees may be less likely to leave the company than they were in previous years when it was easier to find another job. On the other hand, decreasing unemployment rates might indicate other employment opportunities exist and lead to an increase in the number of employees quitting their jobs. This may also make it harder for firms to attract sufficient numbers of qualified applicants. In this case, changes in an organization’s compensation policy to offer above-market wages can help the firm retain its employees, thereby increasing the organization’s internal labor supply. Likewise, if an organization’s required competencies change, its ability to meet its future staffing requirements internally will be hampered if its current employees don’t possess those competencies.
TALENT INVENTORIES AND REPLACEMENT CHARTS Forecasting the likely number of employees that will be available at a given time is only half of the picture. It is also important to identify which current employees might be qualified for the anticipated job openings. This requires gathering information about employees’ skill sets and qualifications. Although identifying some candidates might be easy, identifying as many qualified employees as possible requires more formal planning.
Manual or computerized talent inventories are detailed records or databases that summarize each employee’s skills, competencies, education, training, languages spoken, previous performance reviews, and chances of being promoted. As such, a talent inventory can be a powerful tool for quickly getting the right talent in the right place when it is needed. The New York State Department of Taxation and Finance used an inventory system to reassign employees whose jobs were being eliminated. By allowing employees’ educational and experiential backgrounds to be quickly matched with the minimum qualifications for jobs in various state agencies, the inventory allowed most displaced employees to be placed in other jobs within six weeks.25
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Many companies employ immigrants in relatively low-skilled jobs, despite the fact that the employees graduated from universities in their homelands and have higher-level skills. Once their English improves, these employees can often move into more appropriate roles in the company, but only if the firm knows about their qualifications. Talent inventories help to track this information.
Computerized systems and human resource information systems that track the labor supply and talent inventories of firms can make internal labor supply forecasting substantially easier. Software and services allow companies to match employees’ expertise and knowledge to business needs and deploy the right people just as assets would be deployed in a supply chain.26 IBM’s Workforce Management Initiative borrows many of the same concepts of supply-chain management, such as capacity planning, supply and demand planning, and sourcing. IBM built a structure that outlines the internal and external skills available to firms and provides a minute-by-minute view of the labor supply chain using a computerized talent inventory. The software catalogs skills, creating common descriptors around what people do, what their competencies are, and what experiences and references they have—information that goes well beyond a basic job description.27
IBM’s system was tested when a large client based in Washington, D.C., contacted IBM the day before Hurricane Katrina was about to hit its server hub. The client requested 14 employees with specific skills in data analysis, process improvement, logistics management, project management, and information management. A search was placed, and within 24 hours, 14 individuals were in place in the requested locations to support the recovery effort. Tracking down a team without the system would have taken weeks.28
Replacement charts are a way to track the potential replacements for particular positions.29 A replacement chart can be manual or automated. It visually shows each of the possible successors for a job and summarizes their strengths, present performance, promotion readiness, and development needs. Figure 5-5 shows an example of a replacement chart.
EMPLOYEE SURVEYS The availability of internal talent is dependent on turnover rates, which are not always constant. Conducting employee surveys and monitoring indicators of employee dissatisfaction, such as employee absenteeism and grievances, can help to identify the potential for increased turnover in the future. For organizations with a talent philosophy consistent with retaining employees, or for organizations for which turnover is particularly harmful to a firm’s strategy execution, staying in touch with the attitudes of the company’s employees and managers can be critical. Many firms conduct annual surveys of employee satisfaction and look for declining trends that suggest that turnover rates may rise.
An organization should easily be able to put together an age profile of its workforce, allowing it to forecast how much of its talent in various areas and units it is likely to lose to retirement at various points in the future. Despite the relative ease of compiling this information, a survey by The Conference Board found that 66 percent of participants reported that their companies do not have an age profile of their workforce, suggesting that they lack hard data on how retirements will affect various divisions and business units. Additionally, despite their obvious usefulness for forecasting, more than 63 percent of survey respondents reported that their organizations did not have an inventory of their employees’ skills and talents, and 49 percent did no assessment of their companies’ training and development needs.30 This may be particularly
REPLACEMENT CHART
visually shows each of the possible successors for a job and summarizes their present performance, promotion readiness, and development needs
VPofHR
HR Director Western Region Sam Jones Strengths: Labor relations Job performance: Outstanding Promotion readiness: Ready
HR Director Eastern Region
Pat Wildstrom Strengths: Finance, strategy Job performance: Good Promotion readiness: Needs global experience
HR Director Central Region Sally Posner Strengths: International Job Performance: Good Promotion readiness: Needs development in strategic planning
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FIGURE 5-5 The Replacement Chart for a Vice President of Human Resources Position
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problematic in coming years. According to Development Dimensions International Inc., a global human resource consulting firm, by 2011, 20 percent of large, established companies in the United States will lose 40 percent or more of their top-level talent while the replacement pool of 35- to 44-year-olds declines by 15 percent. This further underscores why it’s so important for organizations to develop proactive staffing plans.31
Forecasting the External Labor Market
All organizations have to hire from the external labor market at some point. In addition to needing to hire new workers to meet expanding demand, outside people need to replace current employees who retire or leave the organization for other reasons. Organizations monitor the external labor market in two ways. The first way is through their own observations and experiences. For example, are the quality and quantity of applicants responding to job announcements improving or getting worse? Global engineering and construction company CH2M Hill creates strategy reports for each country or region that include demographic information, talent availability, local hiring challenges, local and international competitors, commonly used drivers to attract talent, and local salary expectations.32
The second way organizations monitor the external labor market is by monitoring labor market statistics generated by others. The most comprehensive source of free data on conditions in the U.S. labor market is the U.S. Bureau of Labor Statistics (BLS). The BLS Web site (www.BLS.gov) contains information on the nation’s productivity, benefits, employment, and unemployment. It also conducts a National Compensation Survey that provides wage and benefit data for over 400 occupations in over 80 metropolitan and nonmetropolitan areas in the United States. Recently the BLS projected that the nation’s labor supply and demand would be roughly equal, but that shortages and surpluses would occur in some occupations and industries. This means that firms likely to experience shortages will need to extend their workforce plans three to five years to find alternative sources for hard-to-fill positions and/or train the people hired for them. Firms in industries with sufficient talent can focus on more short-term planning.33
This chapter’s Develop Your Skills feature contains additional sources of external labor market information.
It can also be helpful to identify and track trends that might affect future labor supply quality or quantity. Companies like Microsoft watch college enrollment trends and have expressed concern about the low number of U.S. students pursuing computer science degrees. Kevin Schofield, the general manager of strategy and communications at Microsoft Research, states, “We want to make sure that there’s a rich pipeline of great talent that we can hire to build fantastic products, in our own company and in our partners’ companies as well, because it’s about the whole industry and not just the products that Microsoft owns itself.”34
The financial services company Capital One develops three-year labor demand forecasts by anticipating business changes that will impact its headcount needs. Proprietary forecast models determine what the company’s maximum sustainable size is in any given market. By analyzing multiple factors related to its hiring needs as well as demographic trends, Capital One
DEVELOP YOUR SKILLS
Sources of Labor Market Information
Many sources of labor market information and forecasts exist. Here are some of the most popular sources and their Web addresses:
· Conference Board Help Wanted Advertising Index: www.conference-board.org
· Empire State Manufacturing Survey: www.ny.frb.org
· ISM Report on Business: www.ism.ws
· Labor Market Information by State: www.workforcesecurity.doleta.gov/map.asp
· NFIB Small Business Poll: www.nfib.com
SHRM/Rutgers Leading Indicator of National Employment Index: www.shrm.org/line
TrimTabs Online Jobs Postings Index: www.trimtabs.com
U.S. Bureau of Labor Statistics: www.bls.gov
U.S. Census Bureau: www.census.gov
Local Employment Dynamics from the U.S. Census
Bureau: http://lehd.did.census.gov/led
estimates what percentage of the population is likely to apply with the firm over time. It then determines what percentage of applicants is likely to receive job offers and calculates when its labor reservoir will be depleted to the point that it can’t hire enough people. This, in turn, becomes the firm’s long-term, maximum sustainable size around which it plans its expansion strategy. Capital One also does a zip code analysis of employees to determine the optimum areas in which to locate so that it doesn’t poach its own employees from existing locations.35
RESOLVING THE GAPS BETWEEN THE FIRM’S LABOR SUPPLY AND LABOR DEMAND
The next step in the workforce planning process is to compare the firm’s forecasted demand for labor in terms of quality, quantity, and skills with its forecasted supply. Perhaps the organization expects to have the amount and quality of labor to meet its future staffing needs. Or perhaps it expects to have a surplus or shortage of labor. If either a labor surplus or labor shortage is forecast, an action plan should be developed to proactively address the situation. Action plans should always be consistent with the firm’s business strategy, talent philosophy, and HR strategy. For example, layoffs are inconsistent with a talent philosophy of wanting people to contribute to the company over long-term careers and result in negative outcomes for the firm. (In Chapter 12, we discuss some of the alternatives firms can take to avoid laying off employees.)
Instead of having to lay off employees, some industries are desperate for them. The American Nursing Association created a steering committee to develop an action plan to address the nursing shortage in the United States. Here is a portion of the action plan developed to increase the supply of nurses36:
· Communicate nursing’s economic value—educate the public about the pivotal role nursing plays in the nation’s health care system.
· Improve the work environment—improve the conditions under which nurses work so that quality patient care is optimized and nursing staff is retained.
· Communicate the professional nursing culture—assert nursing’s high standards of professional practice, education, leadership, and collaboration to better appeal to potential nurses and enhance the image of the profession.
· Education—reshape nursing education to enhance nursing’s image.
· Recruitment/Retention—enhance professional opportunities to attract and sustain excellent nurses for long, rewarding careers.
Stu Reed, president, Integrated Supply Chain, Motorola Inc., developed an action plan to increase the future supply of supply chain managers. Motorola has identified the likely career path and skills the supply chain professional of the future needs to get to the top job. The company then partnered aggressively with key supply chain schools in North America and internationally. “We validate our model with them and let them know what type of graduates we need for them to provide us,” says Reed.37 In other words, Motorola worked backward to find its supply chain talent.
Whenever changes are observed in labor market conditions, it is important to try to assess whether the change represents a labor market trend that is likely to continue or whether it is a shorter-term fluctuation caused by the business cycle. Understanding the difference is important because different staffing strategies are appropriate for each.38 We discuss what the basic types of actions plans are next.
Dealing with a Temporary Talent Shortage
What should be done if a shortage of qualified talent is thought to be temporary? Offering hiring incentives such as sign-on and retention bonuses consisting of stock options or cash to be paid after the employee has successfully worked with the company for a certain period of time can help the firm cope with the situation. Because higher salaries cost the organization more money for the duration of the new hire’s tenure with the company, it is often better to offer hiring inducements that last only as long as the talent shortage does.39 When companies find it difficult to hire in a tight labor market, they often turn to more expensive recruiting methods, such as additional advertising and search firms, or they lower their hiring standards so that more recruits
ACTION PLAN
strategy to proactively address an anticipated surplus or shortage of employees
BUSINESS PROCESS OUTSOURCING
relocating an entire business function to an independent service provider
are considered qualified for the position. Neither of these strategies is guaranteed to work, and each can produce unwanted consequences.
One short-term solution might be to recruit people currently working for the company. Nonetheless, some positions will likely still have to be filled by new hires. If the root cause of a projected labor shortage is unusually high turnover, the action plan should address the cause of the turnover—for example, low pay, poor supervision, limited career advancement potential, limited training opportunities, and so forth. The firm’s HR managers can then try to uncover the cause of the turnover by conducting employee surveys and discuss the situation with the company’s managers. In some cases, creativity may be needed to resolve projected labor shortages. For example, when H&R Block had trouble finding workers for its technical support call center in suburban Kansas City, it relocated the facility to the inner city and hired workers who lived downtown.40
External talent networks are sometimes used to manage temporary skill gaps. Some organizations set up networks including consultants, freelancers, vendors, and outsourcing providers that they tap as needed to fill short-term talent needs. Principal Financial established a program in which retirees can work on a project-consulting basis, and YourEncore enables member companies to share a pool of retired engineers and scientists.41 Companies can also access global talent in the cloud through Web sites including mturk.com (Mechanical Turk), freelancer.com, and Elance.com. This can give an organization almost instant access to a large number of skilled people who they can hire as and when needed on a contract or project basis.
Business leaders are often attracted to global locations including Mexico and China because of their low labor costs. Labor costs can change quickly, however, making these shortsighted decisions more costly.42
Dealing with a Persistent Talent Shortage
If the shortage is likely to last a number of years, an organization must reduce its demand for the talents that will be in short supply and/or increase its supply of employees with the qualifications it needs. Although it can be possible to increase the firm’s supply of employees, this is not a fast or practical solution for most organizations. Instead, many organizations try to reduce their need for skills that will be in short supply by increasing their use of automation and technology, and by redesigning jobs so that they need fewer people with the talents that are in short supply.
Although to some extent they have done so for cost-saving purposes, Home Depot, Costco, and many supermarkets are among the companies that have automated jobs by installing self-service checkout lanes. Many callers to customer service departments now receive automated responses to their inquiries. Not all jobs can be automated, but it is frequently an option for companies facing talent shortages or wanting to reduce their labor costs by getting the same work done with fewer employees. However, as we have mentioned, automation can generate the need for new employees with specific types of skills—for example, employees who can maintain the automated equipment. These factors must be considered as well when a company decides to automate some of its functions.
The petroleum industry is facing a severe shortage of petroleum engineers, geologists, and geophysicists, despite automating some processes and reducing the number of workers needed in some jobs from three to one. Despite the decrease due to greater automation, the personnel shortage is so serious that the company believes that this will slow the company’s innovation rate, eventually reducing the amount of oil the company will get43
If talent is hard to find or is too expensive, one option is to outsource the affected business process. Business process outsourcing is the relocation of an entire business function, such as production, manufacturing, or customer service, to an independent service provider in the same or a different country. Commonly outsourced business functions include IT and technology services, customer service, and even corporate training. If the firm is able to maintain or improve the quality of the business process being outsourced, the company can not only reduce its costs but can also focus more on its core competencies.
The relationship between $3.7 billion transportation services company Penske Corporation and the business process outsourcing firm Genpact involves more than 30 different business processes and illustrates how some companies are engaging in business process outsourcing and leveraging offshore skilled labor. To reduce costs and improve the quality of its operations, independent Genpact essentially acts as Penske’s virtual subsidiary. When a Penske truck is leased
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for an interstate trip, Genpact’s staff in India check the customer’s credit and acquire permits. If the truck is stopped at a weigh station because it lacks a required fuel permit, Indian workers transmit the necessary document to the weigh station to get the vehicle back on the road within a half hour. After a trip, the driver’s log is shipped to a Genpact facility in Juarez, Mexico, where mileage, tax, toll, and fuel data are entered into Penske computers and processed in India. When Penske sells the truck, staff in Mexico record the transaction.44
Dealing with a Temporary Employee Surplus
When a firm expects a business slowdown to be temporary, it has several options. If slowdowns are cyclical or happen frequently, using temporary or contingent workers who are the first to be let go when business slows can help buffer key permanent workers and provide them greater employment security. Temporary layoffs are another option to deal with a short-term employee surplus, but they sometimes need to last more than six months to be cost-effective due to severance costs 45 greater unemployment insurance premiums the firms must pay, temporary productivity declines in the firm’s remaining workforce, and the rehiring and retraining process. Losing the investments the organization previously made to hire and train the laid-off workers can also be costly. Alternatives to layoffs include across-the-board salary cuts or a reduction in work hours, or reallocating workers to expanding areas of the business. Some firms offer unpaid vaca-| tions, sabbaticals, job sharing, and other creative solutions to temporary surpluses.
When the labor market permits hiring a sufficient number of workers, some retailers utilize the surplus by hiring additional part-time workers and adopting a “just in time” staffing model in which employees learn that they are working within 24 hours or less of a scheduled shift. Some retail workers are expected to call in the night before or morning of a potential shift to learn whether or not they have been scheduled to work. Who gets scheduled and for how long can depend on employees’ previous week’s sales performance or projected customer traffic for the day due to the weather forecast or projected sales. Walmart’s scheduling software alerts managers when an employee is approaching enough hours to qualify for health care benefits 46 Although this can help organizations control payroll costs and prevent understaffing due to turnover, the erratic schedule and inconsistent number of work hours can make it difficult for part-time employees to make enough money, raise children, or take classes.
Dealing with a Persistent Employee Surplus
Organizations sometimes need to permanently reduce the number of people they employ. Technology changes, the entrance of competitors, and changes in customer preferences can fundamentally change the number and types of workers an organization needs. Early retirement incentives, layoffs, and not filling vacated positions can all reduce an employer’s headcount, but not without a cost. Early retirement programs can result in the most skilled and productive employees leaving the organization. Not filling vacated positions can leave key positions in the organization unstaffed or understaffed. Layoffs can damage workforce morale and hurt the firm’s reputation as an employer. Action plans to address a persistent employee surplus can also involve reassignments, hiring freezes, and steering employees away from careers in that position IE to reduce the need for future layoffs. Retraining employees to fill other jobs in the firm can help bring labor supply and demand into balance.
The goal of any staffing strategy is to acquire and retain the most productive employees and remove lower performers. Planning activities that enable an organization to anticipate its future employment needs and scale down gradually rather than abruptly through mass layoffs or dramatic restructuring can help to control the company’s restructuring costs and retain top performers.
STAFFING PLANNING
In addition to workforce planning, it is also important to take the time to plan the staffing process. The three questions that need to be answered are:
· How many people should be recruited?
· What resources are needed?
· How much time will it take to hire the employees?
We address each of these questions next.
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STAFFING YIELDS
the proportion of applicants moving from one stage of the hiring process to the next
HIRING YIELDS
the percentage of applicants ultimately hired
How Many People Should Be Recruited?
Because some job candidates will usually lose interest in the position before being hired and others will lack appropriate qualifications, it is almost always necessary to generate more applicants than the number of open positions. Additionally, having greater numbers of applicants allows an organization to be more selective. This allows it to identify the candidate who best fits the position rather than hiring the only person who applies. At the same time, recruiting solely to reach numerical applicant targets can result in the firm spending more than it should rather than recruiting only the number of applicants necessary to meet the firm’s hiring goals.
The “ideal” number of applicants to recruit for an opening depends on the nature of the organization’s staffing and HR strategies. As we have explained, recruiting too small a pool can result in the firm being unable to identify enough qualified candidates to be able to fill its openings. Too large a pool places unreasonable burdens on the recruiting function’s administrative systems and wastes time and money but does not guarantee that recruits will have the appropriate qualifications. Plus, the firm risks instilling ill will among the many rejected applicants. The goal is to attract a sufficient number of candidates who meet or exceed the personal and technical requirements of the job.
STAFFING YIELDS The best source of information for determining how many people to recruit comes from data collected during a company’s previous recruiting efforts. One way to start is by looking at the firm’s previous staffing yields, or the proportion of applicants moving from one stage of the hiring process to the next, and hiring yields (also called selection ratios), or the percentage of applicants ultimately hired.
For example, as illustrated in Figure 5-6, if three out of four job offers are typically accepted, the company will have to make 100 offers so as to hire 75 employees. If, on average, one job offer is made for every four interviews, then 400 candidates must be interviewed to generate 100 job offers. If four out of five invitations to interview are accepted, then 500 invitations must be issued to produce the 400 interview candidates. If one out of every four applicants is typically invited for an interview, then 2,000 applicants must be generated, resulting in a selection ratio of 3.125 percent (75 hires out of 2,000 applicants). Staffing yield pyramids can be constructed to illustrate these requirements based on the organization’s previous experience, and spreadsheets greatly simplify their calculation and application.
Staffing yields are not the same across all jobs, hiring situations, or economic conditions. In fact, they can vary widely within a single industry or even a single firm. For example, Microsoft only hires about 2 percent of its applicants for software positions, which is typical for its industry.47 On the other hand, organizations like Amway and Discovery Toys hire the majority of their applicants for sales representative positions. Offer acceptance rates are also generally lower for professional and technical candidates than for unskilled and semiskilled workers.
A company’s staffing yields tend to be reasonably consistent from year to year, however. Sometimes trends can be identified that add to the accuracy of the firm’s labor force prediction when other market conditions are taken into account48 For example, if an organization has made its salary levels more competitive or even higher than the market, it can generally expect a larger
( FIGURE 5-6 The Staffing Yield Pyramid )
applicant pool and a lower percentage of applicants hired as a result. At the very least, prior staffing yields can be a good starting point for estimating probable yields and minimum applicant quantity requirements for the current recruiting effort. A primary disadvantage of relying on past staffing yields to forecast a firm’s recruiting needs is that ideally an organization will be able to improve on its past yield ratios by analyzing the effectiveness of its different recruiting sources, targeting its recruiting efforts at the most productive sources, and identifying and leveraging the recruiting methods that work best for the given job. However, if the applicant pool an organization attracts in the future is of higher quality than it has been in the past, then the firm can recruit fewer applicants yet enjoy even greater hiring yields and selection ratios. This will allow it to hire a greater percentage of applicants able to do their jobs successfully, thereby improving the average performance level of the company’s workforce.
It is important to remember that the key issue is not whether the firm’s staffing yields are high or low. What matters is whether the staffing system is producing the right numbers of the right kinds of employees in the right time frame. Although staffing is an investment, not an expense, a key issue for many organizations is the need to control its monetary investment in staffing. This can be accomplished by limiting the size of the applicant pool or by more efficiently managing the application process. If the proportion of high-potential applicants increases, the total number of applicants needed to generate the right number of the right quality of new hires decreases. In the past, however, it was widely believed that recruiting a larger applicant pool was always better than recruiting a smaller pool because it would increase the odds of high-potential candidates being in the pool. This assumption does not necessarily hold true. Smaller applicant pools can actually be superior once you consider recruiting yields and costs.
As an example, assume that an organization wants to hire the best talent it can find (say, the top 10 percent of the talent in a given field) and that the organization’s applicant assessment methods are able to flawlessly assess the talent of each applicant. In the past, the organization would have probably tried to generate as many applicants as it could and hire one-tenth of them. This would result in a low hiring ratio. In fact, it was thought that the lower selection ratio would actually lead to higher-quality employees being recruited. This could, indeed, occur, but only if the entire spectrum of talent available to the firm applied for the position. For example, if a disproportionate number of undesirable people applied for the position, an even lower hiring ratio would exist. However, the lower ratio wouldn’t necessarily lead to higher-quality employees being selected. A better strategy would be to increase the number of high-potential applicants and decrease the number of low-potential applicants. If an organization is able to do this effectively, it will be able to increase the quality of its hires while simultaneously increasing its staffing yields and getting a better return on its recruiting investment.
Increasing the quality of the applicant pool will also lessen the burden placed on the firm’s applicant assessment and selection systems because more of the applicants are likely to be successfully hired. The time and financial resources invested in recruiting and evaluating each candidate are also less likely to be wasted if better recruiting results in a greater proportion of applicants being a good fit. Additionally, it is important to remember that even the best applicant assessment system cannot identify potential high performers if they never apply with the organization. Targeted recruiting efforts will increase the probability that the top candidates apply.
Organizations sometimes seek to obtain high yields (hiring a large percentage of applicants) in the recruiting function to keep costs down, but this strategy often doesn’t consider the potential dilution of an organization’s talent. High hiring yields can be detrimental to the effective recruitment and selection of employees if the quality of the applicants isn’t simultaneously considered. However, if an organization leverages the recruiting methods and sources that work best for it, it may be able to alter the talent distribution of its applicant pool to contain only the best of the available talent—for example, the upper 50 percent. In this case, a much higher targeted recruiting yield (say 30 percent) could produce the same quality of new hires as did a lower 10 percent yield under the traditional method when a greater number of undesirable candidates were included in the applicant pool. Clearly, hiring the best 5 of 50 low-quality applicants is less ideal than hiring the best 5 of 20 high-quality applicants.
Evaluating the staffing yields from different recruiting sources can help in this regard. The quantity and quality of hires from various recruiting sources are likely to differ both within and across organizations. One company might be able to hire good performers from newspaper idvertisements. But another company or a different division of the same company might find
WORKLOAD-DRIVEN FORECASTING
forecasting based on historical data on the average number of hires typically made per recruiter or the average number of recruits processed per recruiter over a given period
this strategy ineffective. Determining which recruiting sources are the “best” to use generally varies also with the nature of the position and its level within the organization. The Internet might be a very effective recruiting source for recruiting applicants with higher-level information-technology skills, but less effective for recruiting applicants for clerical or manufacturing jobs. Recruiters are likely to differ in their annual hiring rates and the quality of their hires. If an organization needs to hire quickly, it is very helpful for it to know how long it has typically taken to fill positions from a variety of sources so that it can strategically choose among them. The advantages and disadvantages of many different recruiting sources will be discussed in more detail in Chapter 6.
If an organization has failed to collect staffing yield information during its previous staffing efforts, estimating the staffing yield for its current hiring effort will be more challenging but not impossible. Headhunting agencies, college placement offices, and the like might be able to provide the firm with some information on the average yield ratios of their candidates. The firm can also attempt to benchmark the yields of similar organizations. This information is not ideal, however, because it won’t be specific to the actual company doing the hiring or the actual job being hired for. The characteristics of the company itself, including its competitive position, compensation package, image, quality of life, and recreational opportunities where the job is located can dramatically influence staffing yields.
What Resources Are Needed?
According to the Saratoga Institute,49 there are six basic costs related to external hiring:
1. Advertising expenses
2. Agency and search firm fees
3. Employee referral bonuses
4. Recruiter and applicant travel costs
5. Relocation costs
6. Company recruiter costs (prorated salary and benefits if the recruiter performs duties other than staffing)
These six factors account for 90 percent of hiring costs. (The Saratoga Institute adds an additional 10 percent to cover miscellaneous expenses including testing, reference checking, hiring manager time, and administrative support.50)
The internal cost per hire calculation is very similar, and includes four elements:51
1. Internal advertising costs
2. Travel and interview costs
3. Relocation costs
4. Internal recruiter costs
Companies for whom talent is key to their success are understandably willing to invest more in sourcing and recruiting. If the value of a great employee is 300 times more than an average one, as one Google executive speculated, it makes sense to have a recruiting budget 10 times or more the size.52 In addition to these costs, determining the total cost of the firm’s staffing effort involves determining the resources and size of the recruiting staff the company will need to hire the employees it is seeking.
Next, we discuss two methods of estimating needed resources for a staffing effort: workload-driven forecasting and staffing efficiency-driven forecasting.
WORKLOAD-DRIVEN FORECASTING Workload-driven forecasting uses historical data on the average number of hires typically made per recruiter or the average number of recruits processed per recruiter over a given period of time—for example, a week, month, or year. For example, referring again to Figure 5-6, if an organization’s average recruiter can process 100 applicants during a recruiting drive, the company will need a staff of 20 recruiters to process 2,000 applicants. Similar procedures can be used to estimate the amount of additional resources—the telephone costs, advertising costs, photocopying, background checks, medical tests, and so forth—needed for the staffing effort. The amount of money that needs to be budgeted for the staffing effort depends not only on the number of people to be hired but also
whether applicants are local or from far away, the recruiting sources used, the selection methods employed, and the tightness of the labor market.
STAFFING EFFICIENCY-DRIVEN FORECASTING Another method of forecasting how many recruiters are needed is based on staffing efficiency. Staffing efficiency53 is the total cost associated with the compensation of the newly hired employees—that is, the total starting base pay of all new employees. For example, if a firm’s internal and external staffing costs were $100,000, and 10 people were hired, each with a starting base salary of $60,000, the firm’s staffing efficiency would be 100,000/600,000 or 16.67 percent. Lower staffing efficiency percentages reflect greater staffing efficiency.
Because the staffing efficiency approach is financially and efficiency driven rather than workload driven, it can be a useful metric for evaluating how well a firm’s staffing plans work. The method can also be used to set a budget for an upcoming hiring effort. For example, suppose the firm wants to achieve a staffing efficiency ratio of 15 percent or less, and plans to hire 25 new employees per month at an average starring base salary of $50,000. In this case, the firm will have a budget of $187,500 (25 x $50,000 x 0.15) a month to spend on recruiters and other staffing resources.54
How Much Time Will It Take to Hire the Employees?
Hiring managers, of course, don’t want jobs to be vacant any longer than necessary. However, it takes time to find, screen, and negotiate with each new hire. Often it takes longer than expected. In 2012, the average time to fill a position was 33 days.55 Establishing a staffing timeline before beginning the staffing initiative ensures that hiring managers, recruiters, and other staffing specialists know what to expect. Information on the average interval between a candidate’s application and interview, interview and offer, offer and hire, and so forth, can be useful for timeline development purposes. By looking at these intervals, HR personnel can identify daily, weekly, and monthly goals for each staffing step.
The length of each staffing stage varies widely across jobs and organizations. In general, higher-level positions take longer to fill than lower-level positions. However, skill shortages and local competition can lengthen the time to fill lower-level positions as well. The staffing technology the firm uses—whether it uses resume-screening software, accepts job applications over the Internet, and so forth—can greatly impact how long each staffing stage lasts, too.
Figure 5-7 illustrates a typical hiring timeline.
Throughout the staffing process, reliable, accurate progress reports should be prepared and compared to the staffing plan. It could be that some stages of the staffing process take longer or shorter than projected, and the projected timeline should be adjusted accordingly. Maintaining progress reports can also help the firm determine whether it is on track to produce the total number of hires the organization is striving for within the targeted period of time. If the current hiring pace is found to be too slow, the organization might be able to take steps to speed up the process or recruit more people than it had initially intended.
If it is known that job openings are likely to exist, based on historical turnover or hiring patterns, the recruiting staff can begin sourcing and processing candidates before the positions even become open. This can dramatically reduce the time it takes to hire someone to fill an opening because candidates are already in the pipeline. We’ve described this approach, called continuous recruiting, in earlier chapters. The method is particularly useful for positions that turn over relatively quickly—for example, openings will need to be filled throughout the year on
STAFFING EFFICIENCY
the total cost associated with the compensation of the newly hired employees
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Application
Telephone Assessment
Interview
Job Offer Extended
Job Offer Accepted
Begin Prejob Training
( 14 d ays + 7 days + 7 days + 7 days + 14 days FIGURE 5-7 An Example of a Typical Hiring Timeline )
7+ weeks total = lead time required
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a rolling basis. It can also work well for jobs that take a long time to fill, or for jobs that cost the organization a lot of money while they are vacant. Sales jobs are a good example. Batch recruiting, in contrast, involves recruiting an entirely new applicant pool every time the organization has one or more positions to fill. Jobs recruited this way typically take a longer time to fill.
If organizations in a particular industry tend to recruit on the same cycle, a job-centric staffing philosophy may reduce the quantity of available talent. For example, if engineering companies tend to start their college recruiting in November and confirm new hires in March, waiting until a job opening occurs in March to begin recruiting for a replacement may mean that an organization is forced to recruit from the other organizations’ rejected job candidates. Recruiting after competing organizations do may work for an organization using a low-cost strategy that is not looking for top-tier talent, but other organizations may be unable to identify a sufficient number of quality applicants because they are recruiting out-of-cycle with their competitors.
Strategic Workforce Planning at Black Hills Corporation
To keep its business sustainable, energy conglomerate Black Hills Corporation knew it needed to engage in workforce planning in the face of an aging employee population. Many of the soon-to-be retirement eligible employees, including engineers, natural gas technicians, and systems operators, had highly specialized skills that would make them difficult to replace.56
The company’s strategic workforce planning process began with a review of Black Hills’ workforce to identify how many employees were expected to leave voluntarily within five years and how much its businesses were expected to grow. Any job functions expected to be changed, added, or relocated were identified. The company also studied the length of time it takes replacements to reach full productivity in different jobs.57
Based on the results, Black Hills created a five-year plan outlining its labor needs for each job in each business and location. Because Black Hills operates multiple businesses, including oil and natural gas exploration, electricity generation, and coal mining,58 it needed to develop different talent pipelines for different skills. This led it to make changes in how it recruits and hires, including filling the recruiting pipeline earlier for highly technical positions requiring greater time to productivity once a person is hired.59
To help address skill shortages in some key areas. Black Hills is also working with technical schools to develop customized training programs to help it fill a specific number of entry level jobs per year for a number of years. Retirement eligible workers are also being enticed to stay on the job longer.60
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Summary
Forecasting the number, types, and quality of employees needed to execute the business strategy is critical for effective staffing. Setting talent goals and objectives that are consistent with the firm’s staffing strategy and talent philosophy are important goals of the planning process. The assessment of the organization’s external labor environment and a company’s own talent strengths and shortcomings can influence its competitive advantage and the business strategies it is likely to be able to pursue successfully.
It is important to determine the size of the recruiting staff and resources that will be needed and to secure the appropriate budget and resources before the staffing initiative begins. Additionally, it is important for planning purposes that the timeline for the recruiting effort be established to ensure that the correct number of new hires will be ready to start when they are needed. Although this is particularly critical before an expansion effort or the hiring of an unusually large number of people, it is also important to assess needed resources before hiring a single individual to ensure that hiring goals can be met and that the hiring manager understands what to expect from the staffing process.
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Takeaway Points
1. The workforce planning process starts with the firm’s business strategy. After articulating the firm’s talent philosophy and strategic staffing decisions, a workforce analysis is then conducted to forecast both labor demand and labor supply, and to identify any gaps between the two. Action plans consistent with the firm’s talent philosophy are then created to address any gaps. The action plans are then monitored, evaluated, and revised as the firm’s environment changes.
2. An organization can predict its future business activity by using seasonal forecasts, interest rate forecasts, currency exchange rate forecasts, competitor forecasts, industry and economic forecasts, and other methods, such as whether it is entering or exiting a business.
3. An organization can use ratio analysis, scatter plots, trend analysis, or judgmental forecasting to determine its demand for workers.
4. To forecast its internal labor supply, firms can use transition analysis, judgment, talent inventories and replacement charts, and employee
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