An Age of Uncertainty

In such a turbulent time, Peter Cappelli looks at how talent management is changing for HR leaders.

“Many employers lurched from a panic over shortfalls of talent just a few years ago to a surplus of talent”
-Peter Cappelli

Talent management is the process through which employers anticipate and meet their needs for human capital. Getting the right people with the right skills into the right jobs – a common definition of talent management – is the basic people management challenge in any organization.  

In the context of the US recession, many companies are no longer paying attention to their talent management programs, especially the signature programs associated with management and career development. They argue that their current problem of trying to cut costs is so preoccupying that there is no time or energy to work on talent issues.

The irony here is that their immediate challenge – having more employees than the work that is available – is itself the most basic failure in talent management. And that is the mismatch between supply and demand. Many employers lurched from a panic over shortfalls of talent just a few years ago, to a surplus of talent.
 
Most talent management practices, especially in the US, fall into two equally dysfunctional camps. The first and most common is to do nothing – making no attempt to anticipate your needs and developing no plans for addressing them. Recent survey data suggests that about two-thirds of all US employers are in this category. Making no attempt to anticipate and plan for needs means relying on outside hiring, a reactive approach that has begun to fail now that the costs and difficulty of finding candidates has risen. The second strategy, which is common among older companies, relies on complex bureaucratic models of forecasting and succession planning from the 1950s – legacy systems that grew in an era when business was highly predictable. These models fail now because they are inaccurate and unresponsive, as well as costly.

The most important problem faced by virtually all employers is uncertainty and the need that results to respond quicker to changes in competitive environments. How many of us planned for the 2008 financial meltdown? We cannot expect to plan for all the important contingencies that affect our businesses, so we need to be up front and acknowledge both the uncertainty and our need to manage it. 

The greatest risks in talent management are, first, the costs of a mismatch in employees and skills (not enough talent to meet business demands or too much, leading to layoffs or a poor fit between individual attributes and requirements) and, second, the costs of losing your investments in talent through the failure to retain employees.

The risk management problem facing talent management is analogous to problems already analyzed in the field of operations research. For example, the practical definition of talent management, getting the right person in the right job at the right time, is identical to the basic task of supply chains.

Risk has two aspects: the uncertainty of a given outcome occurring, and the costs of that outcome. It may be possible to reduce the uncertainty associated with business outcomes through better forecasting, but it is easier to make progress in managing risk by understanding and then reducing the costs of mistakes.

For example, it is hard to forecast how many units of some product will be needed, but it is relatively easy to know the costs of not having enough product and services to meet demand (losing opportunities as a result) versus the costs of exceeding demand (producing inventory). Cost effectiveness demands that we choose the amount to supply that minimizes both costs. In other words, it is not enough to simply estimate the demand: to minimize costs, you need to know what the costs will be when you are wrong, as you inevitably will be in an uncertain world. It is also important to have an idea of how wrong your forecasts have been in the past and how likely it is that they will be wrong again.

The way to deal with the costs of uncertainty above is ‘make and buy,’ choosing the mix of internal development for the number of positions that we are absolutely certain we will need, even in the least rosy scenarios, and then making up any shortfall through outside hiring.

Many employers right now are in the midst of tough decisions about whether to cut jobs and employees and, if so, where to do it. We can get a great deal of insight about that decision by applying a tool from finance: options theory. With options, we turn the problem around, rather than asking what the savings might be from cutting them, we ask, what’s the benefit from retaining them? The difference is that the latter is forward-looking and helps us manage uncertainty in the future. Using this approach against the costs of retaining the employees generates a very clear measure of whether it is worth doing.  For our purposes, the key here is that we are trying explicitly to address the uncertainty in the future.
 
We can do something similar with planning for succession. Long-term succession plans are mistakes because they assume that we know which jobs will need to be filled in the future and which current employees will be around to fill them. Many companies update their succession plans every year to try to keep up with the fact that jobs change and individuals leave. As a practical matter, how useful is a plan if it must be changed every year? What problem is it solving? A better approach is to use the principle of portfolios. To apply this concept to talent management, consider the idea of talent pools, where you avoid developing employees to fit narrow, specialized jobs. Instead, you develop a group of employees with broad and general competencies that should fit into a range of jobs. Once the candidates are developed, you can allocate them to the actual vacancies, as opposed to trying to guess years in advance where vacancies will occur and which individuals should slot into them. The fit between candidate and specific job may be less than perfect. But just-in-time training and coaching can help close the gap.

This new approach to managing talent is fundamentally different from what has come before because it takes seriously the most important problem facing business today, and that is uncertainty. We don’t have to reinvent the wheel to address this challenge, but it necessary to think about talent management challenges through a different lens.

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Peter Capelli is the George W. Taylor Professor of Management at the Wharton School and author of Talent on Demand: Managing Talent in an Age of Uncertainty.  Harvard Business, 2008. www.talentondemand.org.