You are on page 1of 168

The Talent Paradox: A 21st century talent and leadership agenda

A selection of recently published articles from Deloitte Review Foreword by Jeff Schwartz

Talent

Talent

Contents
Foreword | 2

Attraction: New views of talent, work and strategy


The Talent Paradox Talent and Work | | 7 19 | 28 | 38
Critical skills, recession and the illusion of plenitude

Playing to your strengths

Where Did Our Employees Go?

Examining the rise in voluntary turnover during economic recoveries

Diversity as an Engine of Innovation

Retail and consumer goods companies find competitive advantage in diversity

Corporations, careers and culture


Mass Career Customization The Corporate Lattice | | 64 | 77 53
Building the corporate lattice organization

A strategic response to the changing world of work

Culture and the Myth of the Black Box

Why you canand shouldmanage your companys culture

ii

The Talent Paradox: A 21st century talent and leadership agenda

A world of talent
Headwinds, Tailwinds and the Riddles of Demographics Talking About Whose Generation? Smarter Moves | 108 | 98 | 88

Why Western generational models cant account for a global workforce

Improving the value of global mobility by aligning strategy, investments and operations

Deep Talent, Vast Distances

119

Realizing the full value of global knowledge workers

Decisions: Numbers, human nature and performance


Irrational Expectations Beyond the Numbers A Delicate Balance | | | 129 140 153
How statistical thinking can lead us to better decisions

Analytics as a strategic capability

Organizational barriers to evidence-based management

Talent

Foreword

The future is already here. Its just not very evenly distributed yet.

William Gibson

With the relentless march of technologydriven innovation, mobility and connectedness, and a rising ocean of data redefining what is possible strategically, our industrial and post-industrial models for talent and the organization are inadequate at best. The changes are in front of us every day and yet we rely on talent practices and models from earlier eras: corporate ladders; organizational hierarchies; spans of control. Even the notion of talent management reflects an age when much of the worlds work (and schools) were organized on models that looked more like factories and manufacturing lines than knowledge networks. Perhaps the 21st century for talent and work began with the current decade. The 00s were in many ways a continuationthe last gaspof the last century. In the past ten years, the world of work has redrawn its boundaries: we have seen three billion new capitalists join the global market place in China, India, Brazil, the former Soviet Union and now Africa and the Middle East; the emergence of a hyperconnected world (albeit with spikes in global creative city centers); and social and mobile technologies that have changed the way we live and work. The challenges are clear: business is driven by globalization, technology, and hyper-connectedness. And yes, work is done differently distributed, virtual, knowledge-intensiveand

by populations that are different demographically and in their goals and expectations. Physical space, hierarchy and tenure, which together described most of what you needed to know about talent in decades past, have lost much of their preeminence and relevance. Credentials and education are important, but continual learning in the context of technological change and social collaboration is even more essential. We are beginning to understand more about how work will be done in this century and the types of people who will thrive in this environment. The collection of articles that we present in this book will, we trust, inform a broader emerging view of a disciplinefocused on talentthat is emerging as co-equal with strategy and technology in many discussions of corporate growth and performance. These articles examine several themes: Attractionthe new retention: In the depths of the Great Recession, it became too easy to view talent as a simple in-out proposition, with few people leaving and many wanting in. Given the critical nature and shortages of an increasing number of skills, however, it has become clear that a recession is not a serious retention strategy: businesses need to become better at understanding critical talent and why the best decide to join, to stay or leave and designing work in ways that seeks to improve the talent experience perhaps

The Talent Paradox: A 21st century talent and leadership agenda

much like the customer experience. Similarly, the connections among the consumer market, businesss workforce and corporate brands can be particular sources of competitive advantage. Diversity, in all of its forms, is an essential part of this. In short, the challenge is moving beyond models of retention to strategies of attraction. Careers, culture and corporations: Oddly, given the significant shifts in how work is done, and in the aspirations of newer generations with new expectations entering the workforce, the ladder model for the corporate career track soldiers on with its uniform expectations for everyone. The importance and changing expectations of talent in the new workplace point to a need to revisit the one-size-fits-all approaches. Likewise, culture impacts performance, and the traditional and passive notion that culture just happens underestimates its importance as a factor to be managed: an organization can be a platform for performance, or a bog that impedes even the best from achieving to their potential. A world of talent: The art and science of leading, attracting and developing talent in a global context is emerging as both a challenge and opportunity. Many businesses are far from proficient when it comes to deploying and engaging with knowledge- and skilled workers around the world. Further, demographic issues vary by country, suggesting that it really is no longer sufficient to implement one talent strategy or one product strategy globally. Decisions: Data and analytics are poised to reshape approaches to business including workforce and talent issues from recruitment

to development to deployment. The concept of making informed talent decisions by the numbers has moved from the realm of metaphor to the realm of possibility: what is the interplay between culture and talent analytics: what kind of company loves its quants and is better for it? Are we ready or even equipped as organizations to accept the insights we can glean from data and analytics, or will we, like the scouts described in Michael Lewis Moneyball, cling to our gut instincts and tribal wisdom? The interplay between talent and work in the 21st century is evolving rapidly, and so should our views on how we lead and how we think about talent challenges. Generational changes and a global workplace transformed by technology are putting stresses on the traditional models. But, in almost any way I can think of, this new, flat (okay, sometimes spikey) and hyper-connected, work-anywhere world is shaping up to be a fascinating and creative place. It is different. And it demands more of us as creators, collaborators, professionals, specialists, producers, managers and leaders. It is an exciting time for those comfortable with new ideas. I believe the articles we have collected in this volume offer a taste of the opportunities awaiting those who see the chance to change how we think about talent and work in new, different, and hopefully increasingly impactful ways. Jeff Schwartz Global Co-Leader, Talent, Performance and Rewards Deloitte Consulting

Talent

The Talent Paradox: A 21st century talent and leadership agenda

Attraction: New views of talent, work and strategy

The Talent Paradox: A 21st century talent and leadership agenda

The Talent Paradox


Critical skills, recession and the illusion of plenitude
By Robin Erickson, Jeff Schwartz and Josh Ensell > Illustration by Brian Stauffer

ith relatively high unemployment and low voluntary turnover, it is tempting to go back to business as usual and put employee recruitment and retention challenges on the back burner. Many executives may expect there to be a surplus of labor available that companies can swoop in and grab when the market picks up. However, this is only half of the story. Despite high unemployment, many companies are increasingly having trouble filling job vacancies, with over 3.2 million unfilled jobs in the United States as of July 2011.1 Worse, these shortages often occur in critical, skilled roles that have high barriers to entry and are crucial to a companys success. This points to a talent paradox: While there is a surplus of job seekers, some companies are facing shortages in critical areas where they most need to attract and keep highly skilled talent. In other words, high unemployment rates do not mean that the talent you need will be there when you need it. This talent paradox is raising the stakes in the competition for critical talent, with organizations trying to outbid each other for a select group of critical employees and the skills they need to succeed. Poaching competitors top performers is becoming commonplace. This competition is fueling rising salaries as well as prospective employees expectations, making it

difficult to meet skill needs while keeping labor costs at desired levels. A targeted retention strategy can help companies navigate the talent paradox through an increasingly sophisticated view of what employees are looking for, what they value and why they are leaving. If a company can better understand why employees are leaving, it can take the requisite actions to get them to stay in effect, creating a retention firewall to keep employees in and competitors out.

A recession isnt a strategy

ompanieS face a labor market where, despite high unemployment, they still need to focus on attracting, developing, managing and retaining their critical employees who have opportunities to leave for higher salaries and more varied job roles and experiences. As the economy improves, we expect employees with critical skills will begin to leave their employers in larger numbers based on historical turnover after recessions and recent Deloitte* research that suggests only 35 percent of global employees surveyed expect to stay with their current employers.2,3 Since employees desire to change jobs is so strong, one may wonder why these employees have not already left. The main reason is that
7

Talent

the majority of these employees have nowhere to go in the current labor market. However, critical employees whose skills are in demand, no matter the economic situation, frequently can leave to go to another organization. Because organizations have a constant need for this critical talent, power in the labor market for these skills and talent is shifting from demand (organizations) to supply (employees). Even when the economy is down, these employees have opportunities to leave if dissatisfied with their jobs and retention incentives. Overall, quits (or voluntary turnover) have dropped significantly since the recession began in December 2007. However, since the National Bureau of Economic Research declared the end of the recession in June 2009, the economy is slowly beginning to see an increase in voluntary turnover as workers switch from one job to the next (Figure 1).4 In May 2011, 2 million employees quit their jobs, the highest level since December 2008 and a 35 percent increase from a low of approximately 1.48 million employees who quit their jobs in January 2010.5 Critical and highly skilled talent is cautious but increasingly on the move. Despite an increased level of voluntary turnover since

January 2010, there has not been a significant change in overall unemployment. Part of the reason is that employees who have opportunities in the market quit their jobs after receiving better job offers instead of quitting to join the ranks of the unemployed.8 Lost critical talent is becoming increasingly difficult to replace as the shortage of skilled employees continues to grow, even in emerging markets with higher numbers of science and engineering students. Employees with critical skills often fill roles with barriers to entry (e.g., length of training, arduous certifications, legal issues such as citizenship requirements), take a long time to develop the requisite experience, and are in limited supply. In these labor markets, companies can go out and buy more workers (up to a point), but the wage increases needed to attract these workers and make them take the risk of leaving their current jobs could be very significant. However, even a large increase in wages will not necessarily lead to many new people ready to fill the jobs in the short run; because of the time it takes to develop these employees, it could be years before workers are more readily available.9 This only increases the importance of a companys retention efforts to its overall success.

Figure 1. U.S. quit level in thousands of employees, total nonfarm, seasonally adjusted (June 07 to July 11)

Quit level (in 1,000s of employees) 3,500 3,000 2,500 2,000 1,500 1,000 Jun Dec

Recession begins December 2007

Recession ends June 2009

Jun

Dec

Jun

Dec

Jun

Dec

Jun

2007

2008

2009

2010

2011

Source: Bureau of Labor Statistics: Job Openings and Labor Turnover Survey6 and National Bureau of Economic Research7

The Talent Paradox: A 21st century talent and leadership agenda

Software engineers are one area where companies inability to keep and find the engineering talent they need is impacting their ability to create new products. Daniel Gruneberg, co-founder of the daily deal site Zozi, notes that there are a lot of ideas, but to actually do it you need someone to build it.10 To try to attract the necessary talent from the market or competitors, technology companies have begun to increase starting salaries, benefits and stock options. Reggie Bradford, CEO of Vitrue, noted that his company now pays starting salaries of up to $90,000 for engineers with one year of experience, over $20,000 more than they paid six months ago.11 Because of this high demand for talent, voluntary turnover and job switching are common in technology companies. For example, Top Prospect, an incentive-based social recruiting site, analyzed the companies their users left and subsequently joined to show the flow of employees through Silicon Valley. Their analysis showed high flows such as Facebook gaining 15.5 employees from Google for every one employee Facebook lost to Google, Apple gaining 7.6 employees from Yahoo! for every one lost to Yahoo!, and LinkedIn gaining 22 employees from Microsoft for every one lost to Microsoft.12 While these flows are due in part to the relative size of the companies and the attraction of future IPOs, with constant turnover such as this, it is no wonder technology companies offer a wide range of benefits to try to retain top talent. However, just as using the recession as a retention strategy has proved ineffective, poaching employees with critical skills isnt a strong talent strategy for longterm success.

Meeting the employee retention challenge

ompanieS retention strategies should take an increasingly sophisticated view of why employees are staying and leaving. Yet, as Deloitte surveys and recent data show, business and HR executives perspectives on what they think their employees want and what employees actually want often differthis is especially true of nonfinancial programs and priorities. So where should business and HR leaders focus their retention efforts? To successfully attract, develop and retain the key employees needed to succeed in todays economy, three imperatives emerge: Identifying the employees and skills most critical to your organization and strategy. Determining what different groups, generations and, wherever possible, individual employees actually want through increasingly personalized approaches. Cultivating your capabilities to understand, anticipate and predict what is driving your employees to leave.

1. Identifying the employees and skills most critical to your organization and strategy
Organizations should first identify their critical workforce segments, those employees who drive a disproportionate share of revenue, who are difficult to replace and without whom an organization cannot execute its business strategy. These are the employees that a company needs to acquire and keep to be successful in the market. Identifying the key

DElOITTES lOnGITuDInAl TAlEnT SuRvEy SERIES


Talent Edge 2020 is a longitudinal survey series conducted for Deloitte Consulting LLP by Forbes Insights that explores changing talent priorities in all industries at large businesses in the Americas, Asia Pacific, and Europe the Middle East and Africa. Available at www.deloitte.com, the Talent Edge 2020 series follows Deloittes Managing Talent in a Turbulent Economy series from 2009 and 2010.

Talent

workforce segments that produce the most value to the organization and focusing efforts on these groups enable executives to make talent investments that yield the most significant return. Our experience suggests that many companies think they do this but actually find it hard to do for a variety of reasons, including company politics, HR concerns and an egalitarian discomfort with saying one group of employees is more valuable to the organization than others. However, focusing investments on critical workforce segments is no different than focusing capital investments on the areas of the company growing the fastestit is all about getting the most return for the dollar invested. Given how technological change, regulations and globalization continue to drive structural change in the labor market, companies should go beyond identifying their critical talent in the present and also take a long-term view that considers finding and keeping the skills needed now and in the future. It doesnt help that these skills are changingsometimes rapidly. As the economy continues to evolve, it will increase the pace at which current skills become obsolete and are replaced with new ones. For example, the skills companies needed their software engineers to have only a few years ago have now become commonplace and replaced with new ones such as mobile application development and HTML5technologies that barely existed only a few years ago. Not only are the required skills continually changing in the world of technology, but most companies are demanding new skills from their skilled trade workers. Additionally, a lack of qualified trade workers with the new, necessary skills is leading to labor shortages that could impact the proliferation of new technologies. For example, in the solar industry, there is a rapid increase in demand for photovoltaic installers and electricians with specific experience in solar installations as job growth for these occupations was expected to exceed 40 percent from 2010 to 2011. Given this rapid growth, solar employers cannot find the qualified workers they need as there are not enough workers with the necessary skills.13 In response
10

to this and the overall increased demand in the green energy sector, the National Joint Apprenticeship and Training Committee, a joint program between the International Brotherhood of Electrical Workers and the National Electrical Contractors Association, published a Green Jobs curriculum with 75 lessons to help apprentices learn new skills and to further develop journeymen looking for the skills needed to work in the green economy.14,15 Developing employees with the skills needed today is key to resolving the labor shortages; however, development programs also need to be focused on the future as skills will continue to evolve. Skills evolution has also occurred in the services sector. For example, ManpowerGroup notes that companies are now looking for salespeople who have skills such as excellent oral presentation, critical thinking and consultative approach: ability to read people, diagnose problems while only a few years ago they were looking for salespeople who had assertiveness, thorough knowledge of product or service and competitive nature.16 Because of constant skill change, it is no longer enough to hire a critical skills worker; you need to hire a critical worker who has the latest skills and the ability to up-skill over time. If companies want to thrive in a constantly changing market, they will not only need to attract and retain employees to fill key jobs; they will also need to focus on developing and attracting employees with the right skills within these jobs and keeping them. Health care providers are experiencing this issue in the area of medical coding. Coding is how organizations take the descriptions of patients conditions and turn them into codes that can be easily tracked and grouped together, and it plays a key role in insurance reimbursement, reporting and quality of patient care. Currently, the practice of medical coding is going through a transformation as companies and countries move from the World Health Organizations International Classification of Diseases (ICD) Ninth Revision to the ICD Tenth Revision. The

The Talent Paradox: A 21st century talent and leadership agenda

Figure 2. Top three most effective retention initiatives by generation: Executives expectations vs. employees desires

Baby Boomers (ages 48 65)


EXECUTIVES EMPLOYEES

Generation X (ages 32 47)


EXECUTIVES EMPLOYEES Promotion/Job Promotion/Job advancement* advancement*

Millennials (31 and younger)


EXECUTIVES EMPLOYEES Promotion/Job Promotion/Job advancement* advancement*

Promotion/Job Additional advancement* benets (e.g., health and pensions)

Additional bonuses or nancial incentives

Support and recognition from supervisors or managers*

Additional bonuses or nancial incentives

Additional bonuses or nancial incentives

Individualized Additional career compensation planning (within company)*

Flexible work Additional arrangements* compensation

Leadership development programs AND Flexible work arrangments*


(Tied)

Additional compensation

Additional bonuses or nancial incentives

Additional bonuses or nancial incentives

*Indicates non-nancial retention initiative

changes from ICD-9 to ICD-10 are significantfor example, the number of diagnosis codes will increase from approximately 13,600 to approximately 69,000 to allow for more granular descriptions.17 Additionally, companies in the United States have to move to this new standard quickly as the U.S. Department of Health & Human Services set an October 1st, 2013 deadline for ICD-10 compliance.18 Some health care organizations have been early adopters in moving to ICD-10 and have trained their employees on ICD-10 as part of that transformation. However, since other health care organizations now need these resources, competitors are increasingly trying to poach medical coders with ICD-10 skills. Because of increased demand, codersw with

ICD-10 skills are receiving large offers to leave their current employers and move to competitors. If health care organizations want to keep the medical coders that they invested in training from leaving, they will need to understand their needs and target specific retention initiatives to keep them.

2. Determining what different groups, generations and, wherever possible, individual employees actually want through increasingly personalized approaches
Once an organization confirms which employees are critical, they should conduct a diagnostic to find out what these employees really want through anonymous employee
11

Talent

engagement surveys, focus groups and inperson conversations. Research from Deloittes Talent Edge 2020 and Managing Talent in a Turbulent Economy survey series has uncovered a tale of two mindsets where, for the most part, employers are unaware of which retention incentives are most effective. Most companies think they know what their people want, but often do not take the time to understand what different employees want from them or understand the impact the recession has had over the last few yearse.g., yes, flexible work environments are important, but after three lean years most employees are now more interested in promotions and higher compensation. The risk is that many companies take a blanket approach that does not reflect what employees truly value, which varies based on generational, global and gender differences in addition to the current economic, technological and cultural environment. Generational differences: Different generations have different goals, expectations and desiresand employers should tailor their retention plans to satisfy them. Figure 2 reflects what executives think each generation wants and what each generation is really looking for.19 Coming out of the recession, the foremost thing that employees are looking for are promotions followed by additional financial incentives for Millennials and Generation X and support and recognition from managers for Baby Boomers. Global differences: The latest Talent Edge 2020 report found that almost a third (32 percent) of the surveyed employees in Europe, the Middle East and Africa (EMEA) thought that lack of job security would be the top reason for them to leave an employer and more than half (57 percent) of the EMEA employees surveyed found promotion/job advancement to be the strongest retention incentive. Almost a third (35 percent) of surveyed employees in Americas and 21 percent in Asia Pacific (APAC) chose lack of trust in leadership

as one of the three most significant factors that could cause them to look for new employment today, while only 14 percent of surveyed employees in EMEA made the same choice.20 Talent management and retention need to be viewed as a global art and science. For example, global corporations are more worried about the poaching of critical employees in India than in the United States right now because even with shortages of key skills, the talent markets in the United States are deeper than they are in emerging markets. Part of successfully managing the talent paradox is making sure that organizations that want to compete around the world have a global portfolio of employees, e.g., employees with the right skills in the right countries. Gender differences. Deloittes research found that surveyed men appeared to focus on financial incentives, while surveyed women were more likely to seek recognition. Among surveyed men, 42 percent said additional compensation would keep them from leaving and 39 percent cited additional bonuses or other financial incentives as top retention incentives. Among women, only 27 percent cited additional compensation as a top retention incentive and only 19 percent cited additional bonuses. Meanwhile, 40 percent of surveyed women said support and recognition from supervisors or managers would be a valuable retention incentive, compared to just 28 percent of surveyed men.21 I want what I want, and its not what you think. As technology, the economy and culture change, so too do employees expectations of their employers. Only a few years ago, employees had never even heard of iPhones, would not have dared ask to work from home on a regular basis, and could not have carried their whole office with them unless they had a moving

12

The Talent Paradox: A 21st century talent and leadership agenda

truck. However, employees now expect their employers to provide them the tools they need to work remotely and offer them the chance to do so. To adapt continually to such changes, companies should focus on having a culture that is open and receptive to constantly changing its talent programs to meet its employees needs. It is no longer enough to have a menu of talent programs where employees can pick the ones that meet their tastesinstead, a talent strategy needs to focus on the companys and employees core values to provide the flexibility needed to meet the demands of its talent. When looking at cultural aspects that contribute to retention, consider how values differ by groups of employees, such as generations. Figure 3 shows that nearly two in three

(63 percent) surveyed Millennials rated a companys commitment to sustainability as very important compared to just one in three (35 percent) surveyed Baby Boomers. And by more than 2:1 (32 percent to 13 percent), surveyed Millennials were more likely to consider their employers commitment to corporate responsibility/volunteerism to be very important than were surveyed Baby Boomers. Work-life balance was most important to surveyed Generation Xers at 53 percent, compared to 38 percent for surveyed Baby Boomers.22 As an example, W.L. Gore is a company that focuses on a set of fundamental beliefs and guiding principles that serve as the basis of its strong culture.23 Part of its culture is believing that employees should be passionate about what they want to do and then giving them

Figure 3. When considering an employer, how important is the organizations commitment to the following?

Baby Boomers

Generation X

Millennials

Sustainability

Creating a fun work environment

Work-life balance
Corporate responsibility and volunteerism

Diversity and inclusion


Source: Talent Edge 2020: Building the Recovery Together, April 2011, Deloitte Consulting LLP

13

Talent

the freedom necessary to pursue their passion while at work. Its culture is also shaped by a lattice organizational structure that is free from traditional bosses and managers and makes employees responsible for the work they choose to take on. Continuing to focus on this and other aspects of its culture has allowed Gore to be named in Fortune magazines 100 Best Companies to Work For for 14 years in a row. By continuing to focus on providing its employees what they need to live their cultural values, Gore has been able to gain the talent it needed to earn a spot on Fast Company magazines 2009 Fast 50 list of the worlds most innovative companies.24

3. Cultivating your capabilities to understand, anticipate and predict what is driving your employees to leave
Too many organizations start actively managing attrition at the moment a critical or highly skilled employee tenders his or her resignationin other words, when attrition risk has reached 100 percent. A better paradigm would be to: Identify which of your critical, highperforming and high-potential employees are most likely to leave six months in the future. Understand the reasons why those individuals might leave. Know what you can do to increase their likelihood of staying. The use of retention analytics and predictive models allows organizations to identify employees at risk of leaving before they leave, helping companies to develop the mitigating programs needed to keep their critical employees. By understanding what employees are looking for and what their options are, organizations can do a better job of giving their employees what they want. Internal data (promotion, compensation, etc.) and external data (demographics, economic indicators, etc.)

are modeled to identify predictive patterns, such as the probability of voluntary turnover. Predictive analytics is a sophisticated approach to data analytics, creating leading indicators, as opposed to historical insights. Using advanced analytics to predict turnover risk, down to the individual level, can provide the lead time needed to identify employees who are likely to leave, help companies understand why each individual is at risk, and help determine what to do today to minimize the risk of that employee leaving. The specific reasons that drive the individual risk scores will be unique to each organizations workforce, industry and culture. Rather than deploying costly blanket initiatives, using predictive analytics to determine why specific individuals are at risk enables HR leaders to invest in targeted activities that are customized to the individual or group at the most significant risk of leaving and that have the most likelihood of success through intervention. Recognizing the high demand and turnover rate in management consulting, Deloitte has developed a retention analytics model that identified possible predictors of voluntary turnover for key talent segments in Deloitte. The model helps Deloitte identify both individuals and pivotal groups of employees most at risk. For each employee, the model detailed both the calculated attrition risk score and the key drivers of that risk (reason codes). Some of the top reason codes for Deloitte were the average number of flights taken per week, the average number of hours worked per week, and the number of paid time off (i.e., vacation) hours actually taken. The tool also identified actions that might mitigate the risk of turnover for each employee with a high probability of attrition. Key retention initiatives will soon be implemented by individual, pivotal role and key demographics.

14

The Talent Paradox: A 21st century talent and leadership agenda

Why would anyone choose to work here (and why would they stay)?

iven the talent paradox, that is the question many companies should answer if they hope to attract and retain critical, scarce and highly skilled talent. Companies can no longer assume they can easily acquire the critical talent and skills they need or that talent will stay put in their organizations simply because of economic conditions: The recession and current weak economy are no longer a viable retention strategy for highly skilled and prized employees and leaders. Given the growth aspirations of many companies and the scarcity of critical skills and talent, no matter the economic state, it is increasingly important to proactively focus on giving employees a reason to stay and grow with the organization. At some level, this boils down to treating critical talent like customers, focusing on needs and expectations for money, benefits, job experience, development and corporate values to develop talent or employer brands that clearly summarize what employees (current and future) can expect from their employer. The employer brand a company offers should give employees a sustained reason to want to join, stay and growfocusing on financial, tangible and intangible benefits including a companys culture. To build a strong employer brand, companies should identify their critical employees and determine what they really want and combine their talent experience with their customer experience and overall corporate mission. Finally, there is a good dose of science emerging in what was once mostly art.

Analytics and predictive models can highlight which employees are most at risk of leaving and suggest what actions might get them to stay. Analytical tools and capabilities are now an attractive investment for business leaders whose plans rest on having critical talent in the organization. Ultimately, there is no off-season. With the global economy in the doldrums, it is tempting to consider the recession as an unfortunate but convenient moat around critical talent. Yet, just as planning continues in a turbulent economy, the competition for the best players to implement those plans also continues. Neither the economy nor talent are monoliths. Even as some segments of the workforce see their fortunes fall, others are well aware that they will be key players in growth segments during and especially after economic conditions improve. Being the place those workers seek out, stay and grow is to be in a position of strength. Originally published in Deloitte Review #10, 2012 About the authors Robin Erickson, PhD, is a specialist leader in Talent Strategies with Deloitte Consulting LLP. Jeff Schwartz is a principal with Deloitte Consulting LLP and a global co-leader in Deloitte Touche Tohmastu Limiteds Talent, Performance and Rewards group. Josh Ensell is a consultant with Deloitte Consulting LLP.

15

Talent

Endnotes
1. Bureau of Labor Statistics. Job Openings and Labor Turnover Survey, Series ID: JTS00000000JOL (A). [Database]. Available from <http://www.bls.gov/jlt/data.htm> Accessed November 2, 2011. 2. Bill Chafetz, Robin A. Erickson, & Josh Ensell. Where Did Our Employees Go? Examining the Rise in Voluntary Turnover During Economic Recoveries, Deloitte Review, Issue 5, 2009. 3. Talent Edge 2020: Building the recovery togetherWhat talent expects and how leaders are responding, April 2011, Deloitte Consulting LLP. 4. National Bureau of Economic Research. US Business Cycle Expansions and Contractions. <http://www.nber.org/cycles/cyclesmain. html> Accessed August 28. 2011. 5. Bureau of Labor Statistics. Job Openings and Labor Turnover Survey, Series ID: JTS00000000QUL (A). [Database]. Available from <http://www.bls.gov/jlt/data. htm> Accessed November 2, 2011. 6. Ibid. 7. National Bureau of Economic Research. US Business Cycle Expansions and Contractions. <http://www.nber.org/cycles/cyclesmain. html> Accessed August 28. 2011. 8. George A. Akerlof, Andrew K. Rose, and Jenet L. Yellen, Job Switching and Job Satisfaction in the U.S. Labor Market, Brookings Papers on Economic Activity, 1988, Vol.2, 495594. 9. Geoff Riley. Supply of Labour to Markets. Tutor2u. September 2006. <http://tutor2u.net/ economics/revision-notes/a2-micro-supplyof-labour.html> Accessed August 28, 2011. 10. Laurie Segall, Tech companies desperate for rockstarninja engineers. CNNMoney. 7 March 2011. <http://money.cnn.com/2011/03/07/ technology/tech_engineers_wanted/index. htm> Accessed September 8, 2011. 11. John Helyar and Douglas MacMillan, Techdoms Talent Poaching Epidemic. Bloomberg Businessweek. March 3, 2011. <http://www.businessweek.com/magazine/content/11_11/b4219017796986. htm> Accessed September 8. 2011. 12. The Biggest Talent Losers (and Winners). TopProspect Blog. June 6, 2011. <http://blog.topprospect.com/2011/06/the-biggest-talent-losersand-winners/> Accessed September 8, 2011. 13. National Solar Job Census 2010: A Review of the U.S. Solar Workforce. The Solar Foundation. October. 2010. < http://www.thesolarfoundation.org/sites/thesolarfoundation.org/files/ Final%20TSF%20National%20Solar%20 Jobs%20Census%202010%20Web%20Version.pdf> Accessed September 22, 2011. 14. About the NJATC, National Joint Apprenticeship and Training Committee. <http://www.njatc.org/about. aspx> Accessed September 22, 2011. 15. NJATC Rolls Out New Green Jobs Curriculum, International Brotherhood of Electrical Workers (IBEW), June 8, 2009. <http://www. ibew.org/WorkingGreen/content/training/ EW090408_NJATC_green_curriculum_UPDATE.htm> Accessed September 22, 2011. 16. Manufacturing Talent for the Human Age 2011, ManpowerGroup. <http://www.experis.us/ Client-File-Pile/Site-Documents/ManufacturingTalent.pdf> Accessed September 15, 2011. 17. ICD-10 FAQ, American Academy of Professional Coders (AAPC). <http://www.aapc.com/ icd-10/faq.aspx> Accessed September 16, 2011. 18. Transactions and Code Sets Regulations: Standards for Electronic TransactionsNew Versions, New Standard and New Code SetFinal Rules, Centers for Medicare and Medicaid Services. <https://www.cms.gov/ TransactionCodeSetsStands/02_TransactionsandCodeSetsRegulations.asp#TopOfPage> Accessed September 16, 2011. 19. Talent Edge 2020, in press, Deloitte Consulting LLP. 20. Talent Edge 2020: Building the Recovery Together, April 2011, Deloitte Consulting LLP. 21. Ibid. 22. Ibid. 23. What We Believe: Our Beliefs and Principles, W.L. Gore. <http://www.gore.com/en_xx/ careers/whoweare/whatwebelieve/gore-culture. html> Accessed September 14, 2011. 24. Working in Our Unique Culture: Make Money and Have Fun, W.L. Gore. <http:// www.gore.com/en_xx/careers/whoweare/ ourculture/gore-company-culture. html> Accessed September 14, 2011.

16

The Talent Paradox: A 21st century talent and leadership agenda

17

The Talent Paradox: A 21st century talent and leadership agenda

Talent and Work


Playing to your strengths
By Jeff Schwartz and Andy liakopoulos > Photography by David Clugston

or an increasing number of organizations, the talent crisis is no longer an abstraction. Its an all-too-real threat thats spurring executives, perhaps for the first time, to begin to treat talent as a vital business concern. But despite the best of intentions, business leaders often struggle to link their talent efforts to business strategy in practice. They have trouble identifying talent solutions that address business issues. Or the solutions they choose dont work well enough. Or even when the solutions work, theyre too expensive or unwieldy to sustain. These struggles often result from overlooking a key piece of the talent management puzzle: changing the way work itself is defined and done to align more closely with the employers talent pool. A broader view of talent management that includes both workforce and workplace approaches can reveal an increased range of potential options for addressing talent-related strategies and achieving business results.

Expanding the talent management universe

alent management, one HR executive said in a 2008 Personnel Today article, really is only excellent performance management.1 This remark illustrates the tendency of companies to turn to a growing list of silver bullets and point solutions that claim to solve the key problem driving the array of talent challenges companies face.

Such a narrow view of talent management is common among organizations today. At many companies, what goes by the name of talent management consists primarily of programs focusing on the employee life cycle programs such as recruiting and hiring, learning and development, performance management, and succession planning. Some companies even focus their talent programs on point solutions within the employee life cycle, an approach encouraged by technology vendors who in the past few years have relabeled their single function HR software as talent management solutions. Of course, employee life-cycle programs are critical. Companies rightly invest significant effort, sometimes even too much, in doing them well. But important as they are, they are only one piece of a much bigger picture. Missing from the widespread view of talent management is the broader concept of engineering the work to fit the available talent, as well as the other way around. In contrast to talent-based approaches that focus on helping the available talent better do the work in its existing configuration, work-based solutions focus on changing the what, when, where and how of the work being done to better accommodate the realities of the internal and external talent market. Because relatively few companies engage in work-based solutions, those that can effectively manage work-based and talent-based approaches would be better positioned to gain a real competitive advantage over those that dont.

19

Talent

Work-based solutions can include anything that changes the way work is defined, how it is organized, and how and where it is done. They range from job redesign and process reengineering to virtual workplace and social networking initiatives. They can even involve changing a companys basic operating model to make its operations and work processes more conducive to employee productivity and engagement. Both talent-based and work-based approaches can include what might be called core and differentiating solutions. Core solutions are activities that almost all companies perform. While some companies may be better at them than others, they generally do not fundamentally distinguish one employer from the next. They include most traditional

employee life-cycle programs, as well as the essential work-based activities needed to organize work at any company, such as basic job and organization design. Differentiating solutions, in contrast, distinguish an employer by delivering value in a way that relatively few other employers can duplicate. They focus on talent solutions that are linked directly to critical talent, customers, and specific business activities. Though the list of differentiating solutions is constantly shifting as new ideas arise and older ideas are more broadly adopted, current candidates include targeted talent-based approaches, such as accelerated development and global sourcing, as well as work-based solutions, such as virtual workplaces, social networking, and global mobility.

Figure 1. The expanded universe of talent and work solutions

TALENT-BASED

WORK-BASED

CORE

Recruitment & Stafng Orientation & Onboarding Performance Management Learning & Development Succession Management

Knowledge & Collaboration Organization Design Work Design Job Design

TALENT DIALOGUE* REWARDS TRANSFORMATION* MASS CAREER CUSTOMIZATION*


DIFFERENTIATING

EMPLOYER BRAND*

Accelerated Development Coached Organization Global Sourcing

Global Mobility Social Networking Virtual Workplace

* Catalyst

20

The Talent Paradox: A 21st century talent and leadership agenda

Finally, a company can invest in especially innovative, far-reaching approaches that can be described as catalysts. Catalysts are solutions that transcend the talent-based/workbased and core/differentiating distinctions. They embody a talent-centric approach that, similar to customer-centric external sales and marketing programs, focus on understanding employees needs, preferences and expectations to deliver an outstanding total employment experience. Because so few companies today have adopted such talent-centric approaches, catalysts that take talent-centricity to a high level can drive exceptionally strong differentiation. Figure 1 shows the expanded universe of talent-based and work-based solutions. Using this model as a guide, executives can begin to systematically explore the possibilities for developing talent strategies that extend beyond the employee life cycle to take advantage of work-based solutions, differentiating solutions, and catalysts, as well as the more traditional talent-based, core approaches. This expanded way of thinking can suggest new approaches that may deliver results more effectively than employee life-cycle solutions alone.

productive sooner, but lessen the need for new engineering talent in the first place. The company is consolidating its IT environment to simplify the engineering workflow, significantly reducing the training requirements for new engineers. It also is leveraging the skills of its retired engineers through a collective intelligence technology platform that allows retirees to work on projects as independent contractors. Drawing on improvements in work processes and enabling technology, the platform delivers work requirements to contractors in an organized manner, efficiently incorporates input and delivers feedback, and allows contractors to work on a very flexible basis. The company combined talent and work in an approach that lowered the need for new recruits and extended the productive life of soon-to-be and newly retired engineers, through the reengineered work processes, systems and platform. The approach also gave the company continued access to the valuable experience and skills that its retirees would otherwise have taken with them when they retired.

Backs to the wall


Consider what one industrial products manufacturer did when it realized that 70 percent of its engineers would retire over the next five years. In this companys case, intensive recruiting and hiring efforts werent enough to make up the shortfall; schools just werent producing enough qualified engineering graduates. Moreover, a fragmented information technology (IT) environment and a high reliance on manual work processes not only hampered engineers efficiency, but made it hard for new engineering hires to reach competency quickly enough to replace the skills being lost to retirement. Instead of simply intensifying its recruiting efforts, the company decided to change its work environment in a way that would not only help new engineers become more

Talent as a component of business strategy

iven the dynamic nature of business strategy today, talent strategies and solutions need to be grounded in business planning and operations more than ever. This is where a systematic approach to aligning talent strategy with business strategy can offer valuable guidance. Such alignment begins with articulating the companys business objectives and determining, as specifically as possible, the nature of the talent needed to achieve each of those objectives. Once executives clearly understand an organizations talent needs, they can examine internal and external patterns of talent supply and demand, identify current and likely future talent gaps, and develop specific approaches for filling those gaps based on an understanding of what critical talent values and the companys own appetite for cost, risk and change.
21

Talent

CATAlySTS: THE FOREFROnT OF InnOvATIOn In TAlEnT mAnAGEmEnT


Innovative approaches being piloted by companies and organizations around the world include: Talent dialogue. In talent dialogue modeled on customer-facing market research strategies an employer establishes a systematic, ongoing dialogue with its employees to better understand their views and expectations about the employment experience. Through a variety of channels, the employer explores topics such as employees satisfaction with specific talent and HR programs, career goals, current and future life situation, salary and benefits expectations anything, in short, that can help guide the employers talent management efforts. Rewards transformation. Rewards transformation involves tailoring the design of a companys total rewards program to align with its employees needs and expectations as uncovered through talent dialogue. By understanding employees views on a broad range of work-related factors including not just compensation and benefits but any aspect of the work environment that can affect employee behavior employers can design total rewards programs that shape employee behavior more effectively than making changes to compensation and benefits alone.2 mass Career Customization. In Mass Career Customization, an organization trades the traditional corporate ladder model of career advancement for a more dynamic corporate lattice that allows for planned descents and lateral moves as well as upward climbs. Using the corporate lattice model, employer and employee collaborate to align employees work responsibilities with their life circumstances in a range of ways that satisfies both parties changing needs.3 Employer brand. An employer brand, analogous to a product brand, seeks to encapsulate the total value that employees gain from their relationship with an employer. By articulating and promoting an employer brand, a company can communicate the value of an integrated portfolio of benefits, helping employees appreciate the full scope of what the employer offers and enhancing the attractiveness of the employee-employer relationship.

Several concepts and techniques can be especially helpful in translating a broad understanding of talent needs into specific talent solutions. Perhaps foremost is the concept of critical workforce segments employee populations that drive a disproportionate amount of business value, that are difficult or expensive to replace, and whose skills are in high demand. (An example would be the engineers at the manufacturing company described above.) Identifying critical workforce segments is the first step in setting priorities and talent investments. Focusing on critical workforce segments allows executives to allocate resources to various employee groups based on the value they generate for the business. Another technique, and one with a great deal of upside, is the use of workforce
22

intelligence. Just as companies collect, mine and analyze customer data to better understand their markets, workforce intelligence applies advanced analytics to the huge amounts of workforce-related data typically found in ERP systems, HR information systems, and other repositories to help employers better understand their employees. Workforce intelligence allows employers to go beyond the lagging indicators offered by a simple view of HR data (which tells companies what problems they already have) to identify leading indicators, based on a broader range of workforce-related data, that can help companies predict and develop solutions to issues that they might experience in the future. For example, a predictive model built from a variety of data elements anything from an employees amount of overtime

The Talent Paradox: A 21st century talent and leadership agenda

to the length of his or her daily commute to the turnover rate for similar jobs in the region can quantify the likelihood of and predict reasons for an employee taking a particular action, such as leaving the company. An employer can then use these insights to proactively address impending talent issues.

The expanded universe in action


Companies across a range of industries are beginning to integrate this broader range of approaches talent-based, work-based, core, differentiating, and catalysts to design talent solutions to more directly address business challenges and strategies.

Talent dialogue drives more bang for the buck


A large regional U.S. hospital needed a new talent strategy to match a new set of growth and quality goals. To execute its strategy, the hospital had to deliver outstanding medical care, which meant that it needed to become the regions leading choice for health care employment, especially for highly trained and mid-career nurses. But executives also knew that controlling costs and improving profitability would be critical to the hospitals ability to attract affordable financing for its planned expansion. The hospital would have to find a way to significantly increase its attractiveness as an employer without increasing overall total rewards costs. Executives decided to seek guidance from the source: their employees. Multiple interviews and focus groups with critical workforce segments helped identify several changes that would improve job satisfaction and engagement without necessarily increasing costs. For example, to accommodate the career aspirations of nurses who wanted to rise on the pay scale without moving into management positions, the hospital designed a career path for bedside nurses that allowed highperforming nurses to advance in the organization while remaining in patient care roles. The hospital also moved from a tenure-based to

an experience-based approach to determine certain aspects of new nurses benefits programs, making it a more attractive employer to mid-career nurses who could now take jobs at the hospital without being penalized for their lack of longevity. Executives also conducted a hospital-wide survey that asked employees to rate not only their satisfaction with various aspects of their rewards programs but also the importance of each element base pay, 401(k), time off, training and development, and so on to their level of engagement. Separately, the hospital evaluated both the cost and the effectiveness with which it delivered each rewards element. Putting the pieces together, the hospital was able to reduce spending on several high-cost rewards elements that employees perceived as relatively unimportant, and reallocate the money saved toward improving other elements that were more important to employees but were being delivered less effectively. One of these opportunities involved scaling back certain health and welfare benefits while enhancing training and career development programs. Another was to restructure the disability coverage program to provide universal disability protection while reducing the likelihood of employees accumulating more coverage than they could use. Thanks to the detailed input it obtained through talent dialogue, the hospital was able to reconfigure its rewards programs to improve attraction and engagement without significantly increasing total rewards costs.

Global mobility for global leadership


Top executives at one global company know that it needs leaders with a world-spanning perspective. Every year, the company spends nearly US$100 million to support international job assignments, not just as a way to get the right people to positions in more than 100 countries, but also to give promising talent the international experience and global perspective they need to lead a worldwide organization.

23

Talent

Executives worried, however, that the global mobility program was not delivering the development benefits the company needed. Fully half of the programs annual international assignment budget went to support assignees who fell outside the companys target talent profile. Whats more, in many cases the jobs people were being sent to fill not only had alternative local talent solutions, but didnt align with assignees development needs. Most troublesome of all, the company had no formal procedures to evaluate the impact of an international assignment on an assignees development. To better use global mobility as a development tool, the company created a program that identifies high-potential leadership candidates, evaluates their development needs, and places them in positions across the global organization that will help them gain the skills they need to take on leadership roles. One of the essential attributes the company has identified for successful global leaders is having a global mindset, and an international assignment is mandatory for all participants in this new career path. A structured decision-making process helps senior leaders systematically assess the fit between program participants and open positions, and the program actively measures and evaluates how effectively each job placement shaped each employees development. These changes have put strong execution capabilities behind the companys strategic view of global mobility as a talent investment. The proportion of international assignees fitting the companys target talent profile has increased, and the total cost of the program has decreased by 15 percent as assignments involving people outside the target talent profile have ended without being renewed. Most importantly, the organization is now able to effectively develop the leaders it needs with the right skills and perspectives to create innovative opportunities and drive growth in new businesses and geographies.

An alternative solution to a real issue


Ask most executives how to cut real estate costs without shrinking headcount and theyll probably tell you to move to a cheaper location, double up personnel, or rebuild using smaller offices and cubicles. But thats not how one global financial services company sees it. As part of an enterprise-wide reengineering effort, the company is targeting real estate cost reduction through a large-scale alternative and mobile workplace program. Executives expect this program to not only drive significant savings from shedding excess office space, but also improve employee attraction and retention, increase productivity, and support the companys corporate responsibility and sustainability efforts by reducing its carbon footprint. Above all, they hope to reinforce a performance-oriented culture that focuses on what people do, not where they do it. Combining an analysis of high-cost real estate areas with a detailed examination of job function, business suitability, and cultural norms around work flexibility, mobility and choice, the company identified a target pool of about 35 percent of its employees in locations around the world to participate in the program. These employees are being offered a variety of options for remote and mobile working based on their preferred work style, their job responsibilities, and the companys real estate goals. In a parallel effort, the companys IT infrastructure is being standardized in a way that will enhance employees ability to work from any location. To help make the cultural shift to the new work environment, affected employees and managers will receive training on how to work in, manage and evaluate virtual teams that might include members from a variety of locations, cultures and backgrounds. The entire effort is being backed by a comprehensive communication package that ranges from simple executive memos and project Web sites to videos and town hall meetings. The ongoing shift to a more mobile workplace has required a high degree of collaboration among the companys corporate real

24

The Talent Paradox: A 21st century talent and leadership agenda

estate, IT and HR departments. The project leadership team includes the COO of real estate, a global HR executive and a global IT executive who work closely together to coordinate the required technology, talent and real estate activities. To further drive the necessary cross-functional involvement, the company has developed a detailed implementation guide that describes the specific responsibilities of real estate, IT and HR professionals in each local rollout. And to hold all relevant stakeholders accountable for progress, the projects outcome metrics include not only the extent of real estate savings, but participation rates, technology deployments and other metrics tied to each business unit. Begun in late 2007, the alternative workplace effort is expected to yield overall run rate savings of hundreds of millions of dollars per year by 2011. Management also expects the benefits to employees reduced commutes, greater control over work schedule and location, and a focus on the what of work rather than when or where to improve the companys ability to attract and retain employees who value flexibility. Productivity is expected to increase due to decreased commute times, improved employee ability to use technology, and a work environment that accommodates different work styles and needs. Finally, thanks to its smaller physical footprint and the reduction in employee commutes, the company expects this initiative to help in its efforts to reduce total carbon emissions by 10 percent by 2011.

advantage of a much wider range of techniques than many companies currently use. Some parting perspectives to consider on ways to put this expanded universe of solutions to work: Talent is a business problem, not an HR problem. To have an impact on business issues, talent strategies need to start with business issues not with employee lifecycle issues. For precisely this reason, in fact, some CEOs are appointing business leaders outside HR to head the talent function. But no matter who leads talent, the business challenges should always be front and center. Break down silos. Many innovative solutions, especially work-based solutions, require close collaboration between functions to deliver effectively. In fact, one reason relatively few companies apply work-based talent approaches is that the talent group typically lacks enough visibility into operations to develop appropriate solutions and the authority to make operational changes. A clear executive mandate, supported by multifunctional metrics and an explicit statement of each functions responsibilities, is often needed to foster the appropriate collaboration. Focus on critical workforce segments. A surprising number of companies spread their talent programs across all groups of employees like peanut butter. Not only is this expensive, but it may also leave the companys most valuable and critical workers vulnerable and looking for opportunities elsewhere. For every business and every business strategy, there will be specific critical workforce segments that deliver disproportionate business value and that should command the lions share of a companys attention and resources when designing a talent management strategy. Recognize when good enough really is good enough. In certain areas, being good, not great, may be enough. Executives should carefully choose the nature and amount of a companys talent investment to deliver a valued premium for critical talent without overspending on elements that are less important.

Toward an integrated talent management strategy


The acute talent and business issues facing companies today require an approach that provides new dimensions for solutions. A framework that includes both talent-based and work-based approaches, organized around core and differentiating solutions, can help business leaders develop an expanded talent management strategy that takes

25

Talent

Not all talent solutions require the same level of investment. Innovate to differentiate the employer brand. In a world where the demand for skilled workers is greater than the supply, employers have to give critical talent a very good reason to work for them, stay with them, and come back to them. Thats why innovative, talent-centric approaches, such as the catalysts described previously, can make the difference between a so-so talent strategy and one that consistently delivers on its business objectives. Every company has a strategy to delight its most important and valuable customers in order to keep them in a long-lasting, mutually beneficial relationship. Innovation and talent-centricity can help employers do the same for their most important and valuable talent. Build the right talent infrastructure for your talent strategy. Much of the talent infrastructure in use at companies today was built to administer HR not to engage and develop talent. To accomplish the latter, it is important to recognize that talent infrastructure includes more than HR technology and service delivery. It also includes the technology that supports all aspects of work and collaboration, the change management and communications capabilities to engage employees, and the attitudes and values of the larger corporate culture, including factors such as ethics, corporate responsibility and sustainability, diversity, and leadership. Why? The work employees do, the tools they use, the people they work with, and the leaders they work with are the sea employees swim

in every working day. If the covert messages transmitted by these factors dont coincide with the companys explicit talent management efforts, employees may conclude that the company isnt willing to walk the talk and theyre likely to leave. Companies that master the twofold challenge of building a broad-enough infrastructure to provide the backbone for their talent efforts, while tailoring infrastructure investment to be just good enough in table-stakes areas and excellent in areas that differentiate the company, will multiply the power of their talent solutions in supporting their business strategy. Insanity, as Albert Einstein is credited with saying, is doing the same thing over and over again and expecting different results. A broader approach to talent management one that incorporates talent and work approaches, core and differentiating solutions, and catalysts can help companies avoid such insanity in their talent efforts. By considering the expanded universe of possible talent solutions, executives can take advantage of a much broader range of approaches to help create effective talent strategies that more directly drive business results. Originally published in Deloitte Review #4, 2009 About the authors Jeff Schwartz and Andy Liakopoulos are principals with Deloitte Consulting LLP.

26

The Talent Paradox: A 21st century talent and leadership agenda

Endnotes
1 Talent at the Table, Personnel Today, March 4, 2008, pp. 20-21. 2 Deloitte Development LLP, Rewards Revisited: From Me Too to Value Driver, 2006. Available online at <http://www.deloitte.com/dtt/ cda/doc/content/us_consulting_hc_chrobook3rewardsrevisited_090508.pdf>. 3 Cathy Benko and Anne Weisberg, Mass Career Customization: Building the Corporate Lattice Organization, Deloitte Review, summer 2008, pp. 50-61. Available online at <http://www.deloitte.com/dtt/article/0,1 002,sid=153749&cid=216046,00.html>.

27

Talent

Where Did Our Employees Go?


Examining the rise in voluntary turnover during economic recoveries
By Bill Chafetz, Robin Adair Erickson and Josh Ensell > Photography by David Clugston

aSt forward to smoother seas after the current economic storm: your company has survived. You made the hard decisions regarding layoffs, expenses, and closing facilities to improve operational performance and shortterm earnings. Like your peers, you made cutting and managing costs your number one strategic priority while pushing focus on managing human capital to the back of your mind. But unfortunately this turns out not to be the whole story.

Executives may be tempted to think that their current actions are having no effect on the retention of their employees since voluntary turnover rates have been low throughout the downturn. However, their actions may be actually increasing turnover intentions with many employees planning to jump ship once the economy improves. To prevent the loss of talent typically seen during economic recoveries with a resulting resume tsunami, leaders must avoid making mistakes that increase employees turnover intentions. A downturn,

A TuRnOvER InTEnTIOn IS An EmPlOyEES COnSCIOuS AnD DElIBERATE WIllFulnESS TO lEAvE THE ORGAnIzATIOn WITHIn A CERTAIn TImE InTERvAl, E.G., THE nExT SIx mOnTHS
(Tett and Meyer, 1993)

28

The Talent Paradox: A 21st century talent and leadership agenda

it turns out, should not be considered a license to put human capital management on the back burner. Instead of celebrating the upturn, many corporate leaders may well face a new problem: replacing lost employees as the economy kicks into gear and talent is once again a scarce commodity.

The impending rise of voluntary turnover after a downturn

hile the vast majority of employees stay put during economic downturns, an analysis of the correlations between voluntary turnover (quits) versus unemployment and voluntary turnover versus consumer confidence suggests that employees will begin to leave their organizations once the economy recovers.

When the economy is strong, unemployment decreases as firms hire more employees to create the output needed to meet rising demand. Alternatively, and as expected, when economic demand and growth slow, organizations cut costs and downsize the workforce, increasing unemployment. Because of this, looking at the unemployment rates relationship with voluntary turnover shows how voluntary turnover will change as the economy seesaws back and forth.1 Chart 1 shows that as unemployment goes down, voluntary turnover goes up (and vice versa), which implies that voluntary turnover will most likely increase once the economy recovers. Looking at voluntary turnovers relationship with consumer confidence also shows that organizations should expect employees to leave their current jobs when the economy improves.2 When consumer confidence is

Chart 1. Quit Level in Thousands of Employees, Total Nonfarm, Seasonally Adjusted vs. Unemployment Rate, Seasonally Adjusted

Quit Level 4000

(Thousands of Employees)

Unemployment Rate 8.0 7.5

3500

7.0 6.5

3000

6.0 5.5

2500

5.0 4.5

2000

4.0 3.5

1500 2001 2002 2003 2004 2005 2006 2007 2008

3.0 2009

Quit Level in Thousands of Employees, Total Nonfarm, Seasonally Adjusted Unemployment Rate, Seasonally Adjusted
Source: Bureau of Labor Statistics, St. Louis Federal Reserve Economic Data3

Chart 2. Quit Level in Thousands of Employees, Total Nonfarm, Seasonally Adjusted vs. Conference Board Consumer Condence Index

29

Chart 1. Quit Level in Thousands of Employees, Total Nonfarm, Seasonally Adjusted vs. Unemployment Rate, Seasonally Adjusted Talent Quit Level

(Thousands of Employees)

Unemployment Rate 8.0

4000

high, consumers expect the economy to grow, The cause of voluntary 7.5 causing them to become more willing to spend. turnovers cyclicality 3500 Since consumer spending represents two7.0 S the economy languishes, workers have thirds of gross domestic product, the increased 6.5 reduced alternative employment opportuconsumer spending helps drive economic 3000 growth. Alternatively, when consumer confinities. Since quits are motivated in part6.0 the by prospects of finding a new job, employees do dence drops, consumers expect the economy to 5.5 not quit during the downturn but instead put weaken, and they reduce spending, contribut5.0 2500 their heads down and weather the storm until ing to a slowdown in economic growth. the economy recovers. 4.5 Chart 2 shows that when people expect the However, while the number of alternaeconomy to improve, they are more likely to 4.0 2000 tive opportunities is a factor in voluntary quit their jobs (and vice versa), implying that turnover, it is not the driving force. Instead, 3.5 voluntary turnover will most likely rise when decreased job satisfaction, which is a simple 1500 economic growth is expected to start again. 3.0 single summary measure capturing employThese two trends suggest that, while ees perceptions of how2008 organization their 2001 2004 2006 2007 2009 voluntary 2002 turnover is2003throughout eco- 2005 low 6 treats them, sets employees off along the path nomic downturns, organizations should of voluntary Seasonally Adjusted Quit Level in turnover once the expect a spike in voluntary Thousands of Employees, Total Nonfarm,turnover. During an economic downturn, employees experience decreased job economy recovers.5 Unemployment Rate, Seasonally Adjusted satisfaction for a number of reasons, including

Source: Bureau of Labor Statistics, St. Louis Federal Reserve Economic Data3

Chart 2. Quit Level in Thousands of Employees, Total Nonfarm, Seasonally Adjusted vs. Conference Board Consumer Condence Index

Quit Level 4000 3500 3000 2500

(Thousands of Employees)

Conference Board Consumer Condence Index 140 120 100 80

2000 1500 1000 500 2001 2002 2003 2004 2005 2006 2007 2008 2009 60 40 20

Quit Level in Thousands of Employees, Total Nonfarm, Seasonally Adjusted Conference Board Consumer Condence Index
Source: Bureau of Labor Statisics, Polling Report4

30

The Talent Paradox: A 21st century talent and leadership agenda

increased job insecurity7 and preventable employer mistakes. Decreased job satisfaction drives increased turnover intentions.8 When job satisfaction decreases, employees begin to consider leaving their jobs and start evaluating their alternative employment opportunities. If they think it is likely they will find a job that will bring them more tangible and intangible benefits than their current one, they will begin to have a turnover intention. Once an employee reaches this point, it is likely they will leave your organization as turnover intentions are strongly positively correlated with voluntary turnover.9 Therefore, if you do not take action to prevent a drop in employee job satisfaction and rising turnover intentions, then many of your employees will walk out the door as the economy recovers. First out the door will be your critical workforce segments, those employees and groups that drive a disproportionate share of their companys business performance and generate greater-than-average value for customers and shareholders, top performers, and future leaders who have transferable and highly demanded skills.10

Keeping the lid on employee turnover intentions

t seems counterintuitive employees are not running for the exits in a downturn but organizations should be careful not to alienate employees during a downturn because of the tangible and intangible costs associated with losing talent once the economy recovers. If voluntary turnover increases after an economic downturn, then companies have to bear the costs to recruit, train and attract new employees to replace those who have left. Replacing lost employees quickly becomes expensive. A review of various benchmarks suggests that the cost of replacing an employee lies somewhere between 25-200 percent of leaver salary.11 Not only does turnover have direct financial costs, but voluntary turnover has also been shown to decrease workforce

performance.12 However, these costs are only the tip of the iceberg as customer relationships are impacted, knowledge is lost, and other employees have to pick up the slack. Given this and the trends in voluntary turnover, organizations may think they are fated to see their people walk out the door once the economy recovers. To some extent, that may be true: a good economy presents more options and some people will make the move. But there are several mistakes that organizations make that decrease job satisfaction and increase turnover intentions. These can be caused by both actions taken without proper planning or important actions not taken.

1. Dont forget that your high performers can always get jobs somewhere else.
Your top performers, future leaders, and critical workforce segments increase operational performance, drive value creation, and to put it plainly can succeed anywhere. During an economic recovery, companies are likely to lose these employees as they have the most options. Not only can these employees find new jobs during an economic recovery, but they also are actively recruited during an economic downturn. Forty percent of surveyed executives reported they would try to attract more critical talent with hard-to-find skills in response to the current economic downturn.13
31

Talent

By communicating one-on-one with top performers, you can let them know that they will not be cut, preventing the rise in turnover intentions that might have caused them to look for outside opportunities. Also, instead of offering only additional compensation, consider offering them other benefits, such as developmental experiences that they cannot find elsewhere, for example international assignments, rotational programs, or leadership roles. These actions can increase organizational commitment and help you keep your top performers without breaking already tight budgets.

downturn. By showing that you have dedication to the firm and its employees, you will earn your employees respect and dedication.

3. Dont cut employee compensation to avoid layoffs without first looking at your companys tolerance for compensation cuts.
Throughout the economic downturn, some organizations looking to reduce costs are considering cutting compensation instead of reducing headcount. In a 2009 Deloitte* survey, 326 global executives were asked how they anticipated their organizations focus on reducing costs and employee headcount would change over the next 12 months. As a way to reduce costs, these executives noted that they expected to reduce bonuses (35 percent), benefits (23 percent), and salaries (18 percent).16 However, before implementing compensation reductions, you need to understand your organizations tolerance for compensation cuts because this will determine if they are a better route for your company than layoffs. In 2001, a professional services firm decided to institute pay cuts to reduce the number of layoffs. However, they learned the hard way that their organizations culture was not tolerant of pay cuts. Their top performers, who did not feel tied to the company, knew they could get better money elsewhere. Additionally, those who remained had strong feelings of resentment and a lack of trust toward management; they felt they should be compensated for their hard work throughout the downturn. As the economy picked up and salaries for new hires increased, the company faced salary compression issues taking several years to remedy and saw voluntary turnover increase substantially leading to a talent gap they are still recovering from today. Alternatively, as mentioned in The Boston Globe, Beth Israel Deaconess Medical Center CEO, Paul Levy, recently proposed to his staff
* As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www. deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

2. Dont give leaders bonuses while expecting employees to go without.


Given the public outcry over Wall Street bonuses and automaker CEOs flying in private jets to ask for bailout funds, it is apparent that the focus on executive compensation is greater than ever before. Because of this, CEOs and other executives cannot cut employee salaries and jobs on the one hand and take large bonuses on the other if they hope to prevent a rise in employee turnover intentions. To show that leadership is dedicated to organizational success and is willing to share the economic burden with their employees, leaders should consider a symbolic act of dedication. During the 2001 downturn, the 107 partners of DiamondCluster Consulting unanimously agreed to take a 10 percent pay cut to avoid layoffs. DiamondClusters employees viewed this gesture positively and thought that it reflected their team-focused culture.14 Symbolic acts of dedication have also occurred more recently such as when Gap CEO Glenn Murphy volunteered to take a 15 percent pay cut.15 By following these examples, you will show your employees that you care about them and are committed to your organizations success. Such actions can prevent employees from resenting management and feeling as if they have been treated unfairly throughout the

32

The Talent Paradox: A 21st century talent and leadership agenda

the idea of doing what they could to protect the lower-wage earners the transporters, the housekeepers, the food service people. He told them that to protect these workers, they all would have to make a bigger sacrifice, including giving up more of their salary or benefits. As soon as the words left his mouth, the crowd roared with applause. He went on to ask his employees for cost-cutting ideas and, as emails started to pour in, it was clear that employees were willing to forego pay and benefits to prevent their fellow employees from being let go. For example, employees suggested bypassing raises, working only 4 days a week, giving up vacation and sick time, and eliminating bonuses as possible ways to cut costs and avoid layoffs.17 Because of the interconnectedness between hospital employees, where nurses and administrators rely on janitors and cafeteria workers to keep everything running smoothly, Beth Israel possessed a culture where employees were willing to bypass pay to save their fellow employees jobs. Considering your cultures tolerance for compensation cuts is key to understanding if they are a viable option. If they are, you can avoid the anxiety and insecurity associated with layoffs, which can prevent a rise in voluntary turnover when the economy recovers. However, if your employees are not willing to take a pay cut to keep others jobs, you will create resentment and anger in your company, leading to higher voluntary turnover, especially among your top performers. In this situation, you are also weakening your company because you are losing your best employees to keep your worst.

Managers need to focus on how they treat their employees because employees satisfaction with their supervisors is negatively related to employee turnover.18 The Corporate Leadership Council has reported that 22 of the top 25 most effective levers of employees intentions to stay within an organization were driven by their managers (for example, accurately assessing employee potential, clearly articulating organizational goals, and encouraging employee development).19 Additionally, employees perceptions of manager support play such a large role in their decision to stay or leave an organization that even when employees do not believe that their organization supports them, employee perceptions of manager support can still keep employees committed to their organization, preventing a rise in turnover intentions.20 To make sure managers do their part in preventing talent from leaving your organization, consider tying their bonuses and rewards to not only operational and financial metrics but also to their departments turnover numbers. By tying managers rewards to turnover, you will give them the incentives they need to maintain their focus on their people.

5. Dont assume that downsizing survivors can do all the work of their laid-off colleagues.
In 2000, a technology company had 10 HR coordinators spread throughout the country managing their 650 interns. When the economy dropped in 2001, they decided to let go of all 10 HR coordinators who had experience running the program. Instead of closing down the intern program, they chose one HR employee to run it. At first, the employee taking over this role felt proud that the company thought she could do the work of 10 people, until she realized how much work had to be done. Trying desperately to complete the work of 10 people led to endless long days and nights, causing the employee to resent the company and to leave as soon as the opportunity presented itself. Additionally, the interns

4. Dont let your managers off the hook for retaining their employees.
While manager focus on improving business results is especially important and challenging during a downturn, it can lead to a reduced focus on a companys human capital if managers do not have an incentive to proactively deal with employee issues.

33

Talent

had a bad experience that resulted in fewer accepted offers and negative buzz on campus. While this is an isolated example, we often see organizations, in their rush to reduce costs, cut people without focusing on how layoffs will affect their remaining employees. This causes additional new responsibilities to be thrust upon survivors who are expected to pick up the slack for their downsized colleagues. As a result, employees experience role overload, which lowers organizational commitment and increases turnover intentions.21 Before you cut your employees, analyze their tasks and be prepared to cut their low value-add activities. If you are planning to have employees take on new roles, make sure you provide training and clearly communicate their new responsibilities so they understand what is required.

6. Dont be afraid to communicate what is really occurring.


There is no way around it: spin does not work, and honesty does. At a life sciences company, management refused to announce a downsizing until the day that it occurred because they feared that an earlier announcement would cause people to stop working and begin looking for new jobs. However, as news of the downsizing leaked out and company performance continued to drop, the lack of communication from leadership led to anxiety and fear among their employees. The fear and anxiety reduced organizational productivity as employees spent their time talking and worrying about the impending layoffs. It also led to an increase in turnover intentions throughout the organization because employees knew layoffs were coming but were unsure when they would occur and who would be affected. Contrast that with one public sector organization that was implementing a new claims processing system. Leadership realized early on that the system would lead to a reduction of one-third of their workforce, and they knew which employee roles would not be required in a year. Due to state disclosure laws, leaders

had to go to employees and tell them their roles would be eliminated in a year. However, leadership proactively communicated that cuts were coming, were as transparent as possible, and let employees know they would help those impacted acquire new skills and find new jobs. This targeted and effective communication strategy made it possible for the director to comment only a month after the announcement that the pending layoffs were a non-issue. These two examples show the importance of effective communication in helping reduce employee anxiety and building trust between leaders and employees. Honest and transparent communication can help reduce employee anxiety and turnover intentions as it allows employees to understand that a layoff is coming, how it will affect them, and how the organization will handle the process. Creating trust between you and your employees can also help prevent a rise in turnover intentions as trust may help keep employees supportive of their organization, even when the organizations decisions are unfavorable.22

7. Dont ignore the loss of valuable institutional knowledge caused by downsizing.


When management looks to downsize, there is an incentive to cut as quickly as possible to realize cost savings. However, management often underestimates how much knowledge resides in their workers heads and how little is contained in the organizations systems and processes. Companies may go through layoffs without thinking about those who are left behind, often overlooking the absence of a formal process for knowledge transfer. The resulting chaos may lead to turnover intentions as survivors experience confusion, stress and burnout as they figure out how to do their predecessors work. In some cases, it is impossible for survivors to figure out what their predecessors did, causing some organizations we have worked with to bring back certain terminated employees

34

The Talent Paradox: A 21st century talent and leadership agenda

as contractors, paying them more than when they were employees. Without taking steps to capture this knowledge before it leaves, the organization must decide whether to bring back laid-off employees at higher wages or risk losing customers and productivity as someone new adapts to the job. To avoid this risk and the risk of increased turnover intentions, consider offering downsized employees a financial reward or a service, such as job placement or resume help, to incent them to share their knowledge before they leave.

8. Dont make small cuts over and over again to avoid the press coverage and shock of large layoffs.
A recent New York Times article spoke not of massive headline-making layoffs but of how some companies have begun to routinely carry out scattered layoffs that are small enough to stay under the radar.23 While small layoffs stretched over a period of time may not make the paper, these small cuts still create a lot of anxiety throughout the organization as employees start to wonder when it will be over. Repeating small cuts over time creates increased turnover intentions and wreaks havoc on a companys organizational culture. For example, a consumer products company, which relied on its culture of knowledge sharing to spur innovation, found itself continuously laying off a few workers here and there until, over a period of years, layoffs were a way of life. The constant cuts caused knowledge hoarding to become the new norm. Employees felt they could not be let go if they had information that no one else knew. As a result, employees became increasingly reluctant to share information with their colleagues, leaving corporate knowledge management systems outdated and empty. Consequently, productivity dropped as employees no longer had access to previous work products and spent time worrying about when the next cuts would come. The fear of the ever-impending layoff also led employees to look for new jobs because they never knew if they might be next.

While the decision may be hard, it is better to make one large cut than a bunch of small ones. A single big layoff is tough on everyone but does a lot less damage than seemingly endless rounds of unpredictable cuts, writes Robert Sutton, Stanford professor of management science and engineering.24 By cutting once, you can put the layoff behind you and focus your efforts on improving the morale and reducing the anxiety and insecurity of your remaining employees. This will help reduce the likelihood that your remaining employees will leave the organization, help them once again become productive, and better position you to realize the business benefits that motivated the cut in the first place.

9. Dont buy into the belief that across-the-board layoffs are good for your company.
Often, newspaper layoff announcements include the designation across-the-board. In our experience, organizations implement across-the-board layoffs because they feel they are fair since all departments share the burden. While having employees believe that the procedure for choosing downsizing victims is fair can help increase organizational commitment,25 an across-the-board layoff is bad business and will ultimately increase employee turnover intentions. For example, a pharmaceutical company may ask each department to cut 15 percent of its workforce in an effort to reduce costs. However, in doing so, they will end up cutting their critical workforce segment, the scientists and researchers who develop new drugs that drive company growth, by the same amount as other departments. Such a cut is bad business; You are essentially shooting the goose that lays the golden eggs to keep around the one that lays nothing. Additionally, if such a cut were to occur, survivors on the R&D team could view layoffs as unpredictable, causing an increase in job insecurity, anxiety and turnover intentions among the critical workers.

35

Talent

To avoid these dual threats, you first need to identify your critical workforce segments and avoid cutting there unless you have no choice. During, before and after the cuts occur, get your leaders in front of your employees and prepare them to communicate the reasons, basis and procedures for the layoff. Make sure they are prepared to answer any questions, deliver a common message, and do not say anything that might cause legal trouble.

Endnotes
1. George A. Akerlof, Andrew K. Rose and Janet L. Yellen, Job Switching and Job Satisfaction in the U.S. Labor Market, Brookings Papers on Economic Activity, 1988, Vol. 2, 495-594. Note: Akerlof et al.s data only covered manufacturing as the JOLTS survey was not yet created by the BLS. 2. Kelly A. Clark, The Job Openings and Labor Turnover Survey: what initial data show, Monthly Labor Review, Nov. 2004, 14- 23. http://www.bls.gov/opub/mlr/2004/11/ art2full.pdf . Last accessed 25 Mar. 2009. 3. Chart 1 shows the seasonally adjusted unemployment rate (which is defined as the number of unemployed persons divided by the civilian labor force, where the civilian labor force is the total of all civilians classified as unemployed and employed) and the level of quits in the economy, seasonally adjusted, where a quit occurs when employees voluntarily leave their jobs. Quits data come from the BLS Job Openings and Labor Turnover Survey (JOLTS) (http://www.bls.gov/jlt/). Unemployment numbers data from the Current Population Survey and were accessed using the St. Louis Federal Reserves Economic Data which can be accessed here (https://research.stlouisfed.org/ fred2/ ). Both last accessed on 20 Apr. 2009. 4. Chart 2 shows the same quit data as explained in note 3. The Conference Boards Consumer Confidence Index measures public confidence in the economy by asking respondents to answer five questions evaluating their view of current business conditions and job availability and their view of future job availability, business conditions and income. All data are seasonally adjusted and revised. Data were accessed through Polling Report on 20 Apr. 2009. http:// www.pollingreport.com/consumer.htm 5. Hoyt Bleakley, Ann E. Ferris, and Jeffrey C. Fuhrer, New Data on Worker Flows During Business Cycles, New England Economic Review, July/Aug 1999, 49-76. 6. Donald P. Moynihan and Sanjay K. Pandey, The Ties that Bind: Social Networks, Person-Organization Value Fit, and Turnover Intention, Journal of Public Administration Research and Theory, Vol. 18.2, 2008, 205-227. 7. Magnus Sverke, Johnny Hellgren, and Katharina Nswall, No security: A metaanalysis and review of job insecurity and its consequences, Journal of Occupational Health Psychology, 2002, Vol. 7.3, 242-264.

Preventing the downturn from spreading into the recovery

utting costs and focusing on operational performance can help companies control the flames of an economic downturn, but if they hope to put out the fire completely, they must also focus on their talent. If not, they will be prone to making mistakes that will leave smoldering resentment throughout the downturn. Mistake after mistake, resentment, anxiety and turnover intentions will slowly grow and spread. As long as the economy is not growing, these embers may appear dormant. However, once the economy picks up, new alternative employment opportunities in the economy will ease the way for employees to begin leaving your company. Instead of being able to take advantage of the economic recovery, you may find yourself on the defensive as talent walks out the door.

Originally published in Deloitte Review #5, 2009 About the authors Bill Chafetz is a principal with Deloitte Consulting LLP and works with global companies on their human capital strategies. Robin Adair Erickson, Ph.D, is a manager with Deloitte Consulting LLP and is the Program Manager for the Global Talent Initiative. Joshua Paul Ensell is an analyst with Deloitte Consulting LLP.

36

The Talent Paradox: A 21st century talent and leadership agenda

8. Eric G. Lambert, Nancy Lynne Hogan, and Shannon M. Barton, The impact of job satisfaction on turnover intent: a test of a structural measurement model using a national sample of workers, The Social Science Journal, 2001, Vol. 38, 223-250. 9. Rodger W. Griffeth, Peter W. Hom, and Stefan Gaertner, A Meta-Analysis of Antecedents and Correlates of Employee Turnover: Update, Moderator Tests, and Research Implications for the Next Millennium, Journal of Management, 2000, Vol. 26, 463-488. 10. Robin Athey, Its 2008: Do You Know Where Your Talent Is? : Why acquisition and retention strategies dont work, Deloitte Research, http:// www.deloitte.com/dtt/cda/doc/content/DTT_ DR_Talent_final05.pdf Accessed 30 Mar. 2009. 11. Deloitte, Talent Based ROI-Ways to Improve Employee Impact to the Bottom-Line, 2008. 12. Jason D. Shaw, Nina Gupta, and John E. Delery, Alternative Conceptualizations of the Relationship between Voluntary Turnover and Organizational Performance, Academy of Management Journal, 2005, Vol. 48.1, 50-68. 13. Deloitte, Managing talent in a turbulent economy: Playing both offense and defense, Feb. 2009. 14. Stacy Collett, Surviving the Big Chill, Consulting Magazine, 2001, Vol. 3.7, 46-51. 15. Gap CEO Takes Pay Cut, Associated Press, 19 Mar. 2009, Fox40.com. http://www.fox40. com/pages/landing_local_headlines/?GapCEO-Takes-Pay-Cut=1&blockID=243940 &feedID=190 Accessed 20 Mar. 2009. 16. Deloitte, Managing talent in a turbulent economy: Playing both offense and defense, Feb. 2009. 17. Kevin Cullen, A head with a heart, The Boston Globe, 12 Mar. 2009, http://www. boston.com/news/local/massachusetts/ articles/2009/03/12/a_head_with_a_heart/?s_ campaign=yahoo Accessed on 25 Mar. 2009. 18. John L. Cotton and Jeffrey M. Tuttle, A Meta-Analysis and Review with Implications

for Research, The Academy of Management Review, 1986, Vol. 11.1, 55-70. 19. Corporate Leadership Council, Driving employee performance and retention through engagement: A quantitative analysis of the effectiveness of employee engagement strategies, 2004, Washington DC: Corporate Executive Board. 20. Robin Adair Erickson and Michael E. Roloff, Reducing attrition after downsizing: Analyzing the effects of organizational support, supervisor support, and gender on organizational commitment, International Journal of Organizational Analysis, 2007, Vol 15.1, 35-55. 21. Tammy D. Allen, Deena M. Freeman, Joyce E. A. Russell, Richard C. Reizenstein and Joseph O. Rentz, Survivor reactions to organizational downsizing: Does time ease the pain?, Journal of Occupational and Organizational Psychology, 2001, Vol. 74, 145-164. 22. Joel Brockner, Phyllis A. Siegel, Joseph P. Daly, Tom Tyler, and Christopher Martin, When Trust Matters: The Moderating Effect of Outcome Favorability, Administrative Science Quarterly, 1997, Vol. 42.3, 558-583. 23. Steve Lohr, Piecemeal Layoffs Avoid Warning Laws, The New York Times, 5 Mar 2009. http://www.nytimes.com/ 2009/03/06/ business/06layoffs.html?pagewanted=1&_ r=2 Accessed 25 Mar. 2009. 24. Bronwyn Fryer, Laurence J. Stybel, Maryanne Peabody, Jurgen Dormann, and Robert I. Sutton, The Layoff, Harvard Business Review, Mar. 2009, Vol. 87.3, 33-40. 25. Gretchen M. Spreitzer and Aneil K. Mishra, To Stay or to Go: Voluntary Survivor Turnover following an Organizational Downsizing, Journal of Organizational Behavior, 2002, Vol. 23.6, 707-729. Source for Text Box: Robert P. Tett and John P Meyer, Job satisfaction, organizational commitment, turnover intention, and turnover: Path analyses based on meta-analytic findings, Personnel Psychology, 1993, Vol. 46, 259-293.

37

Talent

Diversity as an Engine of Innovation


Retail and consumer goods companies find competitive advantage in diversity
By Alison Kenney Paul, Thom mcElroy and Tonie leatherberry > Illustration by Igor morski

38

The Talent Paradox: A 21st century talent and leadership agenda

ive decades ago, the case for diversity was a compliance conversation that mainly centered on workplace race and gender differences and was largely motivated to action by civil rights legislation. By the 1990s, the diversity topic had broadened significantly in scope to include a wide range of other identity and cultural categories, including age, ethnicity, religion, sexual orientation and physical ability differences. By then, U.S. society had begun to embrace the concept of recognizing and respecting differences as less of a compliance concern and more a matter of social consciousness and fairness. In short, diversity became the right thing to do.

Fast forward to today, as a new conversation about diversity emerges. As the United States experiences major shifts in its demographic profile, businesses are paying attention, because customer needs and expectations are changing in ways that align with their cultural, ethnic and other demographic-related preferences. Retail and consumer goods companies, in particular, recognize that understanding and satisfying an increasingly diverse customer base is critical to growing market share and the bottom line over the next decade and beyond. The United States is a far more diverse country than it was just 10 years ago, and it is far less diverse today than it will be in another

39

Talent

10 years. Increasingly, retailers and consumer goods companies must embrace diversity as a market force, and that includes diversifying their workforces not simply to do what is right, but because they know that a diverse employee base will drive affinity with and understanding of the customer. The numbers support this: Ethnic shift. The U.S. Department of Commerce reports that 85 percent of U.S. population growth between 2011 and 2050 will come from nonwhite ethnic groups. Today, one in three individuals in the United States are people of color, and by 2050 that proportion is expected to climb to one-half.1 The bottom line. For nearly two decades, the growth in buying power of minority communities has greatly outpaced that of white consumers. (See Figure 1, The rise in buying power by diverse groups.) While purchasing dollars among whites increased by 139 percent between 1990 and 2008, growth in the same time frame was 187 percent among African Americans, 349 percent among Hispanics, 337 percent among Asians, and 213 percent among Native Americans. African Americans are seeing gains in disposable income, giving that segment the ability to spend more. The Hispanic market increasingly represents a larger proportion of all buyers as
Figure 1. The rise in buying power by diverse groups 1990 Buying power
African American Hispanic Asian American native American White (lGBT) lesbian, Gay, Bisexual, Transgender $318 billion $212 billion $117 billion $19.7 billion $3.8 trillion Not avail.

it is expanding in size more rapidly than other groups.2 The economic clout of women. Women really do control the nations purse strings. Research shows that, in addition to experiencing social gains and improvements in workplace equality, their choices impact up to 85 percent of purchasing decisions. By some analyses, they account for $4.3 trillion of total U.S. consumer spending of $5.9 trillion, making women the largest single economic force not just in the United States, but in the world.3 Think strategically about untapped consumer segments. It is estimated that the buying power of the lesbian, gay, bisexual, and transgender (LGBT) market will reach $835 billion in 2011.4 The LGBT community on a per couple basis spends more on luxury goods they are tech-savvy, early adopters, brand loyal and have more household discretionary purchasing power than other segments.5 As the retail consumer landscape evolves, diverse communities are representing a larger and more important part of total buying power. Leaders of retail and consumer goods businesses, in particular, will need to take steps to understand and create affinity with an increasingly multicultural and multifaceted consumer base.

2014 Buying power (projected)


$1.1 trillion* $1.3 trillion* $696.5 billion* $82.7 billion* $13.1 trillion* $835 billion**

Increase between 1990 and 2014


246% 513% 495% 320% 245%

* Source: The Multicultural Economy 2009, Selig Center for Economic Growth ** Source: The Buying Power of Gay Men and Lesbians 2008, Witeck Combs Communications

40

The Talent Paradox: A 21st century talent and leadership agenda

The business case has been demonstrated quite thoroughly. When youve got over one-third of this country as people of color, a diverse workforce benefits in terms of connection and creativity. Regardless of the group, it is hard to form a brand relationship unless you have people that come from those cultures and ethnicities that can connect.6
Parallels with environmental sustainability movement

Don Knauss, chairman and CEO, The Clorox Company

Recent research indicates that forging those connections effectively and for the long term depends, to a significant degree, on having an employee population that reflects the population overall, as well as specific communities served. Appealing to a carefully segmented, diverse market is no longer only a niche opportunity for adventurous store managers and edgy entrepreneurs: Multiculturalism is fast becoming a retail and consumer goods industry opportunity too big to ignore. A diverse workforce serving a broadened customer base is a critical success factor because, as market research further demonstrates, a diverse workforce improves service outcomes and enhances financial performance. Embracing diversity as a way of thinking is the most effective response for business leaders and an important driver of an organizations innovative engine. This means diversity needs to be brought to the forefront of your value proposition and ingrained in the organizations cultural DNA so that it becomes a branded component of how you do business. When an authentic, inclusive culture is at work, a diverse workforce is capable of producing a range of original and engaging ideas that is simply not possible among homogenous employee populations. At the top of the organization, this can translate into more apt and financially rewarding decision-making.

wo separate but aligned studies form the basis of this article. The first was a survey of senior executives at 29 of the largest U.S. retailers based on STORES Top 100 list. Deloitte Consulting LLP conducted the survey in collaboration with the National Retail Federation (NRF) during the fall of 2009 to examine talent trends in the retail industry. Study findings clearly showed that the topic of workforce diversity had moved from being a set of progressive workplace programs to a competitive and value-building imperative for these organizations. We followed up on the initial survey research in the spring of 2010 with a sharply focused project. The goal was to gain a more in-depth understanding of diversity, its apparent transformation from social issue to business strategy, and to identify best thinking and leading practices. In this endeavor, Deloitte Consulting LLP worked with the Network of Executive Women (NEW), an organization focused on providing leading practices, research and learning events related to gender diversity, to conduct more than 30 one-on-one interviews with diverse retail and consumer goods executives, including many respected

41

Talent

The best leaders and the best companies will leverage and exploit diversity to help make their organizations more relevant and sustainable. Their workforce will view the world differently. They will come up with better solutions and be more effective in the market by seeing the opportunities that others in the industry do not see.7

James White, president and CEO, Jamba Juice

industry leaders who also happened to be representative of various diversity populations. Together, these two sets of research findings reveal several compelling lessons and opportunities: 1. Retailers and consumer products companies are missing key openings to capture their share of the growing purchasing power of diverse consumers. 2. Retail organizations must take deliberate steps to bring diverse employees

into their companies through ambitious recruiting efforts and the adoption of strategic practices specifically tailored to attract and develop such talent. 3. Where workforce diversity is aligned with demographics, those employees are playing an increasingly important role in helping their companies connect with a diverse customer base. Retailers have a huge opportunity to leverage their diverse workforce to increase revenue and

I think the greatest benefit we have found is that diversity drives innovation. People from different backgrounds engaged in thoughtful debate leads to groundbreaking solutions. When you have a team that is engaged and reflective of your consumer base, you can better understand, anticipate and meet the needs of your guests.8

Tracey Burton, former director of diversity at Target Corporation 42

The Talent Paradox: A 21st century talent and leadership agenda

market share by involving them in key business decisions. Diverse employees provide access to better consumer insights because they understand the cultural nuances firsthand. A workforce that reflects key characteristics of shoppers motivates improved loyalty as those consumers feel more comfortable doing business with people who understand them and mirror their community. The employee base is further strengthened by development of a pipeline of the best recruits. 4. Understanding how diverse communities make purchasing decisions can help retail and consumer goods companies adjust their product and merchandising strategies. Companies that focus on diversity

in the workforce have a competitive edge in understanding their diverse customer base. Increasingly, companies see a clear strategic connection between recognizing growing needs in a diverse consumer market and value to their bottom line in meeting those specific and distinct product or service preferences. (See sidebar, Insights from Hispanic employees rekindle Kingsford growth; product manufacturer finds value in accessing a diverse markets perspectives.) If you are a food company, for example, the Consumer Expenditures Report of the U.S. Bureau of Labor Statistics makes for some interesting reading9: African Americans and Hispanics spend more on food than on any other item each year. On average, Hispanic American families spend more annually on food than do any other consumer groups.

InSIGHTS FROm HISPAnIC EmPlOyEES REKInDlE KInGSFORD GROWTH; PRODuCT mAnuFACTuRER FInDS vAluE In ACCESSInG A DIvERSE mARKETS PERSPECTIvES
The Kingsford brand of charcoal products was at one time 10 percent of owner Cloroxs revenue and was on the verge of becoming a dead brand a few years ago because of the growing popularity of gas grills. Clorox CEO Don Knauss discovered that a group of Latino employees had pointed out potential value in marketing more specifically to the Hispanic consumer base. That demographic segment, the Latino employees noted, possess a family orientation and penchant for cooking outdoors with wood charcoal that would make them an ideal target customer group. According to Knauss, We focused on getting them (the Hispanic community) acclimated with charcoal briquettes. Connecting them with our brand and introducing charcoal transformed what was a declining business to a growing Kingsford has (since) resurged to 4-6 percent growth.10 In another example, a large consumer products manufacturer wanted to reach out and engage a minority segment of women consumers. Drawing on input from female employees in the same market segment, it created a highly successful affinity marketing campaign that celebrates the diverse, collective beauty of these consumers and focuses on their contributions toward positive change in their communities. The effort is positioning the manufacturing company as a socially responsible corporate citizen in addition to promoting and growing its many personal care brands.

43

Talent

On average, Hispanic (22 percent) and African American (14 percent) families spent more on apparel and services than did any other consumer groups. But, often, having a workforce that understands and is part of the consuming community is essential to translating data into growing the bottom line.

Diversity challenges faced by retail and consumer goods companies


Participants in our research cited a variety of talent challenges associated with becoming more internally diverse and performing better among diverse consumers. One-on-one interviews included the following comments: Our workforce is not reflective of our customer base. Our leadership team is not diverse. We are having trouble recruiting diverse workers. We are held back by lack of understanding of the cultural nuances of diverse consumer groups, and/or diverse consumers do not identify with our brand. Keeping up with a changing customer demographic has great impact on the evolution of the retail value chain. In an era of global competition, retail and manufacturing

companies must fully utilize all of the resources within their control, not the least of which are their human resources. (See sidebars: Going to the source to gain customer understanding and Trends in LGBT market: Online, optimistic and loyal.) The link between customer segmentation and product and service appeal can effectively be made by leveraging a diverse employee base people who instinctively know what customers want because they understand in a very direct way the lifestyle and experience drivers of customers needs and desires. Good news for employers is that diverse employees comprise a growing part of the overall talent pool. Growth of the U.S. labor market between 2010 and 2018 is being projected at about 6 percent, with increases among diverse workers the primary drivers of that expansion: For example, Hispanic workers are expected to increase in that timeframe by 27 percent, followed by Asians at 23 percent, African Americans at 9 percent and Whites at 4 percent.12 Retailers and consumer goods companies that recruit their share of these new entrants at all levels of the organization may realize the opportunity represented by an enhanced cultural mix. This may include added perspective on marketing and merchandising campaigns, improved strategic decision-making and the benefits of these workers direct interactions with customers on the selling floor.

GOInG TO THE SOuRCE TO GAIn CuSTOmER unDERSTAnDInG


IKEA, the Swedish home furnishings manufacturer, has a knack for identifying consumer needs and tastes on a global basis. Several years ago, the popular and highly successful retailer realized it was not reaching Hispanics in California. Since the company is particularly attuned to the vast differences in consumer preferences across the United States, Mats Nilsson, the interior design director at that time, was curious what they had missed. He had designers visit the homes of a number of California Hispanic staff members, which revealed some important gaps in the stores appeal within that community: Displays did not feature dining setups for large families or living room seating for more than two people, which is the Swedish norm. In addition, the IKEA color palette was too subdued and photo/picture displays too minimal to suit typical Hispanic tastes and preferences. By enlarging settings and warming up displays, the store was able to better position itself for success in the Hispanic consumer market.11

44

The Talent Paradox: A 21st century talent and leadership agenda

There is no question that seeking out diversity of thought, background, experience and perspective, coupled with having an inclusive environment where those differences are seen as assets, helps give us a competitive advantage.13

mark King, business partner, Office of Diversity and Inclusion, the Kellogg Company

Start with recruiting for diversity


arget Corporations presence at diversity recruiting events along with its reputation for promoting from within the company has created a recruiting brand that attracts diverse talent. In addition, Target makes a point of recruiting on historically diverse campuses and participating in diversity recruiting events, such as annual conferences organized by the National Black MBA Association, National Society of Hispanic MBAs, Out & Equal, and more. Diverse team leaders from across the company attend these recruiting events so that job candidates are able to see employees who look like them and get firsthand information about a company where they can grow.14 Although many companies have found it difficult to measure the impact of diversity and inclusion initiatives on the bottom line, research indicates that executives from marketdominant companies overwhelmingly believe that diversity is profitable. In a 2009 study by Deloitte Consulting LLP of retail talent trends, senior executives were asked how important diversity and inclusion are to company performance; 90 percent of respondents agreed that it was critical. Furthermore, in another study, Catalyst found Fortune 500 companies with the highest percentages of female corporate officers reported, on average, a 35.1 percent higher return on equity and a 34 percent higher return to shareholders than companies

TREnDS In lGBT mARKET: OnlInE, OPTImISTIC AnD lOyAl


Recent studies regarding the LGBT markets buying power and purchasing characteristics indicate that a high percentage of gay consumers are college-educated, shop online and purchase the latest technology.15 Among other traits cited, gay and lesbian consumers tend to be more optimistic than other Americans about the overall direction of the country and the economic recovery, an observation that has led industry analysts to anticipate that this groups spending may increase, despite the countrys slow progress in regaining its financial health. In addition, LGBT consumers are typically loyal to LGBT-friendly brands and those that speak to them directly. Consumer data indicate that 78 percent of gay online users prefer to buy from companies that specifically advertise to the gay market.16

with the lowest percentages of female corporate officers.17 Measurable goals related to attracting and maintaining diverse talent create accountability, telegraph the seriousness of the initiative,
45

Talent

Retail is a demanding business, and successful retailers dont just overcome challenges, they purposely challenge themselves to improve continuously. It is important that we leverage this willingness to challenge ourselves through our diversity programs and our associates, making diversity an integral part of our culture. The Office of Diversity should not build stand-alone programs. We must instead leverage our approaches into sustainable structures that change the way people think about diversity. Diversity is critical to our broader, fundamental goal of maintaining a competitive workforce, which requires maximizing the potential and value of all our associate base, including their diversity of thought, experience and perspective.19
Cole Brown, chief diversity officer, Walmart Stores, Inc.

46

The Talent Paradox: A 21st century talent and leadership agenda

unambiguously define its scope, allow for the celebration of measurable successes, and clearly illuminate any need for reassessment or improvement. Toward that end, some companies have several diversity recruiters dedicated solely to recruiting multicultural talent.

Retaining diverse talent

nce you have them, you have to keep them. In The Inclusion Paradox: The Obama Era and the Transformation of Global Diversity, Andrs T. Tapia writes, Many diversity best practices have focused on bringing those who are different in the door. Many of these efforts have been quite successful, and companies have achieved diversity the mix. But in many places, the mix is not working well. We end up with diversity without inclusion. Here diversitys promisethat greater diversity leads to greater innovation and profitabilitydies.18 Diverse employees have different motivations, attitudes and lifestyles than those who currently occupy the C-suite in many retail and manufacturing organizations, leaving many to feel that in the long term they simply dont fit in. In these situations, traditional ways of retaining talent must be revisited and made relevant to the needs and values of diverse populations. Mentoring programs and thoughtful succession planning help engage diverse individuals in a well-supported, long-term career with their employer. Retention of high-potential, diverse talent starts with identifying individuals early on so that steps can be taken to invest them in the company and put them on a track to the next level. Another increasingly popular means of providing a community of support is Employee Resource Groups (ERGs) or Business Resource Groups (BRGs), which provide networking, support and professional development opportunities to diverse talent. (See sidebar, ERGs lead to tasty and profitable investments.) In many instances, the paths that led current leaders to the top will not work with

todays diverse talent. Mike Vail, president and COO of Sweetbay Supermarket, tells how he recognized the limitations for women to become store managers based on the career path structures that were in place. He explained that the store manager position in his industry can be demanding, inflexible and sometimes physically challenging. As I began to do work within the area of diversity, he said, I saw this first hand and we started making immediate changes. Traditionally, women would hold positions within service departments (i.e. bakery, deli, front end, etc.) with limited paths to growth. At Sweetbay today, aspiring store managers can complete a customized career path that exposes them to all required aspects of management but in a manner that doesnt discriminate against any biases. Weve seen great improvement with diversity among our store managers as well as in mid- to senior-level management positions. Im proud of the work weve begun.20 Ultimately strong recruiting, retention and development initiatives will build sustainability of the multicultural talent pool and become a self-perpetuating cycle of investing in and receiving value.

Engage diverse talent: Affinity drives loyalty drives business value

op management must view workforce diversity not as a stand-alone program but as an essential element of their organizations value proposition and a critical ingredient of their business survival. Moreover, they must demonstrate openness to fresh ideas and ensure that mere tolerance for differences is replaced by a commitment to inclusion. Rather than lip service, they must actively and genuinely embrace that which makes people differenteven uniquein their experiences and aspirations as well as their physical and cultural distinctions. Sustainable enterprises will be those that view diversity in a holistic, business-focused
47

Talent

ERGS lEAD TO TASTy AnD PROFITABlE InvESTmEnTS


Tapping the innate cultural expertise of a diverse workforce can be quite profitable. Because the consumer is best served when diverse employees bring their unique perspectives to the table, companies often make use of ERGs to develop innovative products and services or bring together diverse task forces to generate solutions around major business issues. There are many examples of successful products and solutions coming out of such groups. At the Campbell Soup Company, Select Harvest was successfully developed by women employees for women consumers.21 ConAgra Foods reached out to its Asian ERG for input into a new line of Healthy Choice Steamers that is seeing great returns.22 Similarly, the Frito-Lay division of PepsiCo involved its Latino ERG in new product development, resulting in the addition of product flavors that reflected Hispanic heritage and enhanced sales.23

consumers who see themselves in the employees by whom theyre served, and enhanced results from both employee recruiting and new business development efforts. Retail organizations and consumer goods companies focused in a meaningful and credible way on diversity can inspire purchases and loyalty with entire populations of consumers who experience the regard, respect and affinity they seek. With the commitment of their top leadership, retail and consumer products organizations will redefine the culture of their companies and genuinely reflect and embrace pluralism for the benefit of their consumers, communities, employees and shareholders. Originally published in Deloitte Review #8, 2011 About the authors Alison Kenney Paul is vice chairman and U.S. Retail Leader, Deloitte Consulting LLP. Thom McElroy is a principal with Deloitte Consulting LLP and is the U.S. Retail Human Capital Practice Leader. Tonie Leatherberry is a principal with Deloitte Consulting LLP and chairs its Diversity & Inclusion program.

way. (See Figure 2.) Their leaders will architect a talent strategy that is inclusive of diversity and that gets the organization where it aims to go. By these actions, company leaders lay the foundation for better insights about their customers, improved loyalty from diverse

Figure 2: A holistic approach to diversity means measuring performance at all levels and embedding diversity into the DnA of the organization make leadership accountable
Build diversity goals in executive compensation Include people development of diverse talent in leadership goals

Set goals at all levels


Create diversity goals at the executive, functional, team and individual levels Hold everyone accountable for their contributions to a more inclusive workplace

Align diversity goals with corporate goals


Create a diversity strategy that supports the corporate mission Make diversity strategy an enabler of business growth

Establish your brand for diversity


Build diversity into the strategic marketing plan Establish a record of external recognition from organizations such as: Diversity, Inc.; Catalyst; Working Mother magazine; the Human Rights Campaign Develop relationships with women and minority leadership organizations

Develop metrics for accountability in: recruiting, retention, development, advancement, bottomline impact, employee engagement, etc.

Establish diversity councils throughout the organization to empower the workforce to innovate and create change

48

The Talent Paradox: A 21st century talent and leadership agenda

Endnotes
1. U.S. Census Bureau, Annual Estimates of the Population by Race, Hispanic Origin, Sex and Age for the United States: April 1, 2000 to July 1, 2008 (NC-EST2008-04) (released May 14, 2009); <http://www.census.gov/popest/ national/asrh/NC-EST2008-asrh.html>. 2. Humphreys, Jeffrey Matthew. The Multicultural Economy. Selig Center for Economic Growth, Terry College of Business, University of Georgia, 2008. 3. The Woman-Led Economy. June 2010. U.S. Womens Chamber of Commerce <www.womenledeconomy.com>. 4. Lucin, Stephen J. Features: Gay Community, Mainstream Advertising: Echelon Magazine, a Gay Magazine For LGBT Business Professionals. Echelonmagazine.com. March 3, 2010. Web. August 25, 2010. <http://www. echelonmagazine.com/index.php?id=1473>. 5. LGBT Demographics and Media Coverage for Planet Out (LGBT). Wikinvest - Investing Simplified. Web. August 25, 2010. <http://www. wikinvest.com/stock/PlanetOut_%28LGBT%29/ Lgbt_Demographics_Media_Coverage>. 6. Don Knauss, CEO of Clorox. Interviewed via telephone, March 19, 2010. 7. James White, President and CEO of Jamba Juice; in-person interview. Network of Executive Women Multicultural Workforce Conference, Dallas, TX, March 16-18, 2010. 8. Tracey Burton, former Director of Diversity at Target Corporation. Interview via telephone, March 18, 2010. 9. Consumer Expenditures Report, 2008, U.S. Bureau of Labor Statistics. 10. Ibid, Don Knauss. 11. Newsweek Magazine, IKEA: How the Swedish Retailer Became A Global Cult Brand, November 14, 2005. 12. Labor Force Data. U.S. Bureau of Labor Statistics. Web. 23 Sept. 2010. <http://www. bls.gov/emp/ep_data_labor_force.htm>. 13. White Men: Enrolling the Dominant Culture in Diversity and Inclusion. Network of Executive Women. Network of Executive Women. Web. <newonline.org>. 14. Ibid. Tracey Burton. 15. LGBT Demographics and Media Coverage for PlanetOut (LGBT). Wikinvest - Investing Simplified. Web. August 25, 2010. <http://www. wikinvest.com/stock/PlanetOut_%28LGBT%29/ Lgbt_Demographics_Media_Coverage>. 16. The Gay and Lesbian Market in the U.S.: Trends and Opportunities in the LGBT Community, Packaged Facts, 4th. Edition 17. Women Matter: Gender diversity, a corporate performance driver, McKinsey & Company, October 2007. 18. The Inclusion Paradox: The Obama Era and the Transformation of Global Diversity. Andrs T. Tapia - Hewitt Associates 2009. 19. Cole Brown, chief diversity officer, Walmart Stores, Inc. In-person interview by Alison Kenney Paul, Bentonville, AR, October 8, 2010. 20. Mike Vail, President and COO, Sweetbay Supermarket. Interviewed via telephone, April 13, 2010. 21. Rosalyn ONeale, vice president and chief diversity and inclusion officers, Campbell Soup Company; in-person interview. Network of Executive Women Multicultural Workforce Conference, Dallas, TX, March 16-18, 2010. 22. Angela Jones, Chief Marketing Officer, ConAgra. Interviewed via telephone, April 15, 2010. 23. Marie Quintana, vice president, ethnic sales development, PepsiCo; in-person interview. Network of Executive Women Multicultural Workforce Conference, Dallas, TX, March 16-18, 2010.

49

Talent

50

The Talent Paradox: A 21st century talent and leadership agenda

Corporations, careers and culture

51

The Talent Paradox: A 21st century talent and leadership agenda

Mass Career Customization


Building the corporate lattice organization
By Cathy Benko and Anne Weisberg > Illustration by Andrew Pinkham

S a senior executive, Steve has had a traditional career in many respects. Always on the move, he scaled the corporate ladder as he built a series of successful business units within the same organization. His wife stayed home to raise their three children, returning to graduate school only when the kids were in middle and high school. In one respect, however, Steve is not so traditional. Ten years away from retirement, he wants to scale back his travel, even though this may limit his opportunities for leadership roles. At this point in my life, my priorities are such that my faith and personal life come before the role I play within the organization, Steve explained. I want to be true to my priorities. In other words, Steve wants options options that have not historically existed for people at the top or on the fast track up the corporate ladder. In fact, for a variety of reasons including better health, financial gains and personal preference, many Baby Boomers nearing retirement do not want to stop working completely, but they dont want to work in the same way theyve been working either.1 What if an ingredient of the solution to the impending talent gap posed, in large part, by the retirement of the Baby Boomers, was to provide options for customizing career paths

in a manner that employees could have their proverbial cake and eat it too? Business leaders like Steve are not the only ones looking for alternatives to the all-ornothing approach of the corporate ladder. Many of tomorrows leaders are searching for the same thing. These knowledge professionals, who are in ever-increasing demand and will drive business growth through the early decades of the 21st century, are redefining what it means to build a successful career. They have grown up in a customized world, where choice is everywhere. As Mark Penn states in his book Microtrends, The power of individual choice has never been greater.2 At the same time, peoples lives are increasingly complex and varied, resulting in the end of the lockstep lifestyle.3 No wonder, then, that men and women are increasingly disappointed with the one-size-fits-all corporate ladder. As a result, we believe responding to the war for talent in the coming years will require a restructuring of both the expectations and the mechanics of how careers are built. In this article, we propose a new model for doing both we call mass career customization (MCC).4 MCC is based on our view that the career journey of knowledge workers increasingly looks like sine waves of sorts, with climbing and falling levels of engagement with work over time.

53

Talent

Figure 1 Corporate Ladder Versus Corporate Lattice

CORPORATE LADDER
Traditional hierarchy Singular path upward Move up or stop moving Work-versus-life balance Fits more traditional family structure Upward momentum Integrated with talent management systems

CORPORATE LATTICE
More conducive to evolving matrix structure Multiple paths upward Move faster, slower; change directions Career-life t Adjusts as workers needs change over time

Assumes workers needs remain consistent over time

From Ladder to Lattice

n fact, we see the corporate ladder model for career progression already giving way to what we term the corporate lattice. In mathematics, a lattice ladder allows one to move in many directions, is not limited to upward or downward progress, and can be repeated infinitely at any scale. In the real world, lattices are living platforms for growth, with upward momentum visible along many paths. The corporate lattice model of career progression allows for multiple paths upward taking into account the changing needs of both the individual and the organization across various intervals of time. It can foster transparency and shared responsibility for career planning, which in turn can drive a new brand of loyalty, based on the continuous collaboration between employer and employee to design customized career paths. While not visible to most managers, much of the challenge they face today likely comes from the fact that knowledge workers are already building lattice-like careers by moving in and out of organizations and up and down hierarchies, albeit often without support or structure from their organizations. In a poll

Deloitte* conducted of over 250 executives across over a dozen organizations, over 70 percent of them said they had dialed up or down, either formally or informally, at some point during their careers.5 Looking back, have you ever formally or informally dialed up or dialed down your career? Stories abound. A former U.S. Marine with an MBA moves across industries and geographies, as well as in and out of the workforce, staying home for three years with his children. He has customized his career in tandem with his wifes as they traverse the world of work and home. Today, he works full-time from home, where he enjoys the level of day-to-day flexibility that this arrangement affords. An attorney turned forensic investigator not only changed careers, but spent six years at home with her children, then gradually advanced and was eventually promoted to partner, all while maintaining an 80 percent schedule. Now, as an empty nester, she is completely dialed up
* As used in this document, Deloitte means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/us/ about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

54

The Talent Paradox: A 21st century talent and leadership agenda

leading a team of 30 and traveling around the world (including England, where her oldest is studying at a university) on business.6
looking back, have you ever formally or informally dialed up or dialed down your career? Votes Received:259 yes no no, but I know someone who has 72.2% 12.0% 15.8%

These stories are evidence that sweeping changes in the way we work, live and build careers are not just on the horizon they are here to stay. Managers are struggling to respond to these changes. They can sometimes have difficulty relating to the issues facing their employees since todays circumstances are different than when these managers were climbing the ladder. They also can make the mistake of treating the changes in the workforce as a series of discrete, singular events. In fact, we believe these events are not only connected, they are converging, creating unprecedented pressure on organizations to accelerate the transition from corporate ladder to lattice.

stagnant career ladders.8 Instead, SAS is continuously calibrating the needs of the business with the needs of its people, moving people around the organization and customizing dialup/dial-down options. While SAS and other companies can demonstrate the benefits of an informal lattice model, we believe that adopting a systematic approach to replacing the corporate ladder with the corporate lattice creates more consistent, scalable results. To meet this challenge, we have designed the MCC framework, which draws on the effectiveness of mass product customization for inspiration. Mass product customization produces business benefits in three areas: reduced costs, increased profitability (through value pricing), and greater customer satisfaction and brand loyalty. MCC can produce similar benefits: reduced acquisition and retention costs; increased productivity through greater employee retention and career-life fit, and increased loyalty from greater connection with employees.

mass Customization Shared Benefits


The workplace has experienced an erosion of loyalty and rise of churn. Fifty-six percent of Americans say that employers are less loyal to employees than a generation ago, and 51 percent say that employees are less loyal.9 About one in three employees had recently been approached by another organization hoping to lure them away, and 77 percent of workers aged 36 to 40right in the pipeline for leadershiplast in new jobs less than five years.12 What The Economist calls the collapse of loyalty has made it harder for companies to respond to the talent shortage, as people move in and out of jobs more frequently.13 This flux is difficult on individuals as well as organizations. Even Gen Y workers, who have a reputation for being fickle, would actually rather stay with one organization if that organization delivered on its commitments and allowed them to grow and contribute.14 From the employers perspective, employee loyalty

Mass Career Customization: Enabling the Corporate Lattice

uilding the corporate lattice organization first and foremost requires a new mental model of career progression based on lattice-like thinking. Some organizations demonstrate this type of thinking with excellent business results. Take SAS, the worlds largest software company. Based in Cary, North Carolina, SAS enjoys double-digit growth, a turnover rate of 3 percent compared to the industry average that hovers around 20 percent, and a customer retention rate of 98 percent.7 They attribute much of these results to innovative workplace practices supported by lattice-like thinking, including work/life integration programs. As its vice president for Human Resources explained, One of the hallmarks of our success is we dont really have

55

Talent

SIx TREnDS COnvERGInG TO CREATE THE uRGEnCy FOR CHAnGE


We have identified six trends which, when taken together, explain the urgency of accelerating the transition to the corporate lattice model.
Figure 2. Workforce trends convergence

KEY TRENDS Shrinking pool of skilled labor Changing family structures Increasing number of women Changing expectations of men Evolving expectations of Gen X and Gen Y Increasing impact of technology WORKFORCE IN 2007 AND BEYOND

Trend 1: Shrinking Pool of Skilled labor


The Economic Policy Foundation estimates that there will be a six-million-person gap in the United States between the number of students graduating from college and the number of workers needed to cover job growth and replace retiring Boomers by 2012 and a 35-million-person gap by 2025.10 Despite assumptions to the contrary, this gap cannot be filled completely using conventional tactics like outsourcing and technology-based productivity gains. In fact, Indiaa major outsourcing destinationis itself starting to feel the pinch, with a 500,000 worker shortfall predicted in its IT sector by 2010.11

Trend 2: Changing Family Structures.


Only 17 percent of U.S. households today are traditional with a husband who works outside the home and a wife who does not, compared to 63 percent of households in earlier generations.15 Nontraditional families are putting pressure on existing workplace models of career progression originally structured to match the mainstream rhythms of the traditional two-parent, single-income household of the past.

Trend 3: Increasing number of Women in the Workforce


Nearly 60 percent of college graduates today are women, graduating with better grade point averages and more honors than men.16 More than half of the management jobs today are held by women. Yet, most womens lives do not fit traditional career trajectories; indeed, the majority of women have nonlinear or discontinuous careers.

Trend 4: Changing Expectations of men


More and more men have reached a point where preserving or increasing their personal time is more appealing than acquiring bigger jobs and more money. A recent study found that 56 percent of senior executives surveyed would strongly consider refusing a promotion if it meant fewer hours available for their personal lives.17

Trend 5: Evolving Expectations of Generations x and y


Defined as those between 18 and 43 years of age, these demographic groups have high expectations for both personal and work lives.18 Members of these generations view careers as personalized paths that fit their individual interests, development goals and desire for many diverse experiences. They are technologically savvy, adaptable to change, and often eager to work using nontraditional methods and schedules.

Trend 6: Increasing Impact of Technology


Advanced technologies continue to pave the way for employers and employees to create new options for when, how and where work gets done. The payoff for using technology in this way can be substantial. Sun Microsystems reported cost savings of more than $387 million over four years from a global program involving more than 55 percent of its 35,000 employees.19

56

The Talent Paradox: A 21st century talent and leadership agenda

can help create customer loyaltycreating a positive, reinforcing relationship. As James Goodnight, CEO and founder of SAS, has said: Over the years, I have learned that employee loyalty leads to customer loyalty, increased innovation and higher-quality software.20 MCC can bring loyalty back into the workplace through a more transparent, continuous collaboration that can benefit both the employee and employer sides of the corporate table. The MCC framework articulates a definite, not infinite, set of options along the four dimensions of a careerPace, Workload, Location/Schedule, and Roleas well as the trade-offs associated with choices across these interrelated dimensions. In collaboration with their managers, employees customize their careers by periodically selecting options along each dimension based on their career objectives and current life circumstances within the context of business needs. These choices are reflected on an MCC profile. The MCC common profile, shown below, depicts what most peoples profile would look like at any particular point in time.

mCC Common Profile


The MCC profile provides a snapshot of each employees career at a given point in time, and it can be adjusted over time. Just as you would adjust the sound on a stereo equalizer

by moving the sliders up or down, MCC allows employees to dial up or dial down to optimize their career paths at varying life stages. Although MCC provides options for multiple career paths, it does not open the door to an infinite number of profile combinations. Our research has shown that, on the contrary, and perhaps counter-intuitively, at any point in time the vast majority of employees will have profiles that look more or less the same (like the one depicted in the MCC Common Profile). However, employees who believe they have some control over career options and enjoy organizational support for their decisions can be happier, more loyal and more productive.21 Even if they dont currently need options, employees can derive a psychic benefit from knowing that options and an organizational process for managing these are available should they need to deviate from common, full-time and unrestricted employment sometime in the future. We call this MCC option value, and it is what, in part, can build a greater sense of loyalty. There is also a cultural value that MCC can deliver by requiring well-framed conversations between employee and employer regarding career choices. The transparency and shared responsibility for career planning that result from these structured conversations can be integral features of a corporate lattice organization.

Figure 3. Mass customization and shared benets


MASS PRODUCT CUSTOMIZATION MASS CAREER CUSTOMIZATION

Increased loyalty from greater connection with customers

Increased loyalty from greater connection with employees

Reduced supply chain costs

Decreased workforce acquisition and retention costs

Increased protability from value pricing

Increased productivity through greater satisfaction and career-life t

57

Talent

MCC Over Time: Whats Your Sine?

Fact, Not Fiction

hile most employees MCC profiles will display common attributes, over time each employees MCC profile will exhibit its own path, recording the series of choices made over the course of the employees career. For many, this path will look like a sine wave of sorts, with climbing and falling levels of contribution over time, as illustrated in the MCC Sine Wave figure below. As this employees career progressed, his level of contribution rose and fell. While he is not fully dialed up today, he anticipates being fully dialed up in the near future. As he explained: I see a time in the not-too-distant future when I will want to dial up my career, in part so that my wife can dial down and spend time at home with the kids before they go off to college. Under the MCC framework, his desire to dial up would be captured in building his next stage MCC profile. This is the option value that MCC delivers.

aving determined the need to evolve into a corporate lattice organization, Deloitte began piloting MCC in 2005 and has since rolled out MCC to approximately 7,500 individuals, with plans to roll it out to over 30,000 additional U.S.-based employees over the next year. The objectives of the pilot and the initial wave of implementations were to: Sustain high levels of client service Quantify the impact of MCC on various talent models Support a cultural shift in acceptability of career customization Improve practitioner job satisfaction and commitment Increase retention of high talent Create a sustainable, scalable model The findings from the Deloitte MCC pilots and the initial waves of implementation

WHy FlExIBlE WORK ARRAnGEmEnTS ARE nOT THE AnSWER


To date, the primary corporate response to the changing workforce has been flexible work arrangements (FWAs). Typical FWAs include reduced hours or part-time arrangements, telecommuting, job sharing and compressed work weeks. FWAs were instituted as a retention tool, but rarely have worked that way. For example, while public accounting firms have aggressively implemented FWAs for years, work-life issues are cited by almost 90 percent of women and men as the reason for leaving.22 Similarly, while over 90 percent of law firms offer FWAs, very few lawyers actually use them, and turnover rates among associates are at an all-time high, with nearly 80 percent leaving by the end of their fifth year.23 Whatever the form, by focusing on the job at the moment rather than the career over time, FWAs have served mainly as way stations in career paths, sideliningand even derailingthe careers of FWA program participants. They are point solutions positioned as one-off accommodations or exceptions that do not scale or address the structural issue of aligning the workplace with the evolving needs of the workforce. FWAs are often negotiated in a state of crisis. They focus almost exclusively on hours and work location at a specific point in time and are neither adequately integrated with the organizations ongoing talent management processes, nor do they address the larger question of career progression. In short, FWAs lack connection with the construct of careers. In addition, men view FWAs as for women only, and utilization among men is extremely low, even though men are increasingly interested in a better career-life fit. Basically, as exceptions to the norm, FWAs do not change the norm. If anything, FWAs result in reinforcing the workplace norm of continuous, full-time employment over the course of ones career. It is our prediction that within the next few years, FWAs increasingly will be viewed as an interim, late-20th-century workplace solution, a transitional step that helped individuals cope with changing work and personal demands. What is needed now is a more significant structural response to the workforce changes that are already well underway.

58

The Talent Paradox: A 21st century talent and leadership agenda

Figure 4 The four dimensions of mass career customization


PACE Accelerated WORKLOAD Full LOCATION/ SCHEDULE Not Restricted ROLE Leader

FOUR DIMENSIONS OF MCC PACE Options relating to the rate of career progression WORKLOAD Choices relating to the quantity of work output LOCATION/SCHEDULE Options for where and when work is performed

Decelerated

Reduced

Restricted

Individual Contributor

ROLE Choices in position and responsibility

were encouraging. Not only was there no negative impact on client service, some clients responded very positively and were interested in what they could learn from Deloittes experience. Participants reported an increase in job satisfaction and productivity, stating that the MCC framework helped them manage work, career and personal life. There has also been a significant improvement in the quality of career conversations. Findings from the initial roll-out of MCC confirmed that, while 85 percent of participants said they were having career development conversations, less than half said those conversations covered careerlife fit. The MCC framework can help bake this element into career conversations. The counseling sessions I have held using the MCC framework were clearly more productive. My counselees came prepared to talk about how their profiles look today and what their profiles might look like in the future. They appreciated the transparency, says Mike Pacetti, a partner with Deloitte and Touche LLP. My counselees talked openly about career-life fit. There was a real acknowledgment of the need to be able to customize careers. In addition, findings from the initial waves of roll-outs further confirm the ways in which MCC builds employee loyalty. First, survey findings confirmed that respondents who have

an effective career-life fit were nearly twice as likely as those who did not have an effective career-life fit to report that they intended to stay for six years or more. And those who projected a good future career-life fit were more than twice as likely to report that they intended to stay than those who did not, confirming that there is a psychic value in knowing a model exists that can be tailored to evolving life circumstancesregardless of whether these options are ever exercised in an extraordinary way. Another key survey finding is that 55 percent of respondents reported upon initial introduction of MCC that MCC had a positive impact on their continued desire to work at Deloitte, and 62 percent of respondents reported that MCC had a positive impact on their likelihood to recommend Deloitte to others as a great place to work. In addition to employee attitude survey results, key metrics for the first wave of MCC roll-outs have positive trends. Retention of top performers in those areas of Deloitte that participated in the initial MCC roll-out improved more than the retention improvements made by Deloitte as a whole. Another key metric, employee referrals, showed that roll-out participants have a higher referral rate than the baseline population.
59

Talent

Figure 5 The mass career customization sine wave


STAGE 1 Career years: 1-5 Phase: Pre-kids
PACE
Accelerated

STAGE 2 Career years: 6-9 Phase: Young kids


ROLE
Leader

STAGE 3 Career years: 10-present Phase: Dueling careers


ROLE
Leader

STAGE 4 Career years: Future Phase: Next


PACE
Accelerated

LOCATION/ WORKLOAD SCHEDULE


Full Not Restricted

PACE
Accelerated

LOCATION/ WORKLOAD SCHEDULE


Full Not Restricted

PACE
Accelerated

LOCATION/ WORKLOAD SCHEDULE


Full Not Restricted

ROLE
Leader

LOCATION/ WORKLOAD SCHEDULE


Full Not Restricted

ROLE
Leader

Decelerated

Reduced

Restricted

Individual Contributor

Decelerated

Reduced

Restricted

Individual Contributor

Decelerated

Reduced

Restricted

Individual Contributor

Decelerated

Reduced

Restricted

Individual Contributor

Enlisted in Marine Corps Completed military service; Moved to manufacturing On accelerated career path Got married

Has two kids in less than two years Spouse scales back to 30-hour work week Rigid demands that he be available to work anytime, and be present at the plant whenever necessary, result in having to be on call all the time

Telecommutes from home ofce, but travels periodically for work; Pace somewhat slower as a result

Intends to dial up PACE and LOCATION/SCHEDULE in the near future to allow his wife to dial down

Referrals are a significant measure of efficacy because the quality of candidates is a higher caliber than the open market, and because its a positive indication of employee satisfaction. While there was a significant concern early in the execution of the pilots that moving to an MCC model would open the floodgates for decelerating careers, the fear was shown to be unfounded. The vast majority of employees elected not to initially change their level of engagement with Deloitte by either dialing up or down. In the eight percent of cases where individuals wanted to adjust their level of contribution, the interest in initiating new requests to accelerate careers outpaced interest in decelerating careers by as much as two to one. Even with these initial positive results, implementing MCC at Deloitte has had its challenges. One challenge has been integrating MCC into existing talent management processes and systems. Articulating the impact of different choices available under the MCC framework on compensation, goal setting, performance reviews and ratings required a

significant amount of attention. The attention was much less about technology per se but around several philosophical areas. For example, whether or not those who elected to dial down could be given high performance ratings (they can) garnered some debate. In addition, there was debate about how to treat performance ratings for those who elected to dial up but failed to achieve their dialed up goals. At the same time, managers have had to take action to integrate new information about their employees plans and desires into how their teams are structured and work is delivered. Not surprisingly to us, there was variability in both their willingness and ability to handle this and their effective counseling abilities. Other organizations are now adopting the MCC framework. One such example is Thrivent Financial, which is using it as a foundation for creating a career culture that appeals to the different generations in our workforce and aligns with our corporate value of respecting the whole person, explained

60

The Talent Paradox: A 21st century talent and leadership agenda

Barbara Foote, vice president of the Enterprise Talent Office at Thrivent. As a financial services institution struggling with high turnover among its sales force and the need to attract an increasingly diverse workforce, Thrivent has been piloting MCC as part of an overall career development program in its Marketing division, where the leaders see the MCC framework as a way to build the talent strength they need to deliver on their goals. Thrivents leadership recognizes both the need to evolve into a lattice organization, and the need to intentionally address those elements of its corporate culture that stand in the way. Specifically, Thrivent was experiencing a reluctance of their people to express career aspirations because of their emphasis on personal humility, as well as the negative perception surrounding lateral moves, which were seen as resulting from either less-than-stellar performance of the individual or hoarding behavior of the manager. Things are different now. MCC allows our people to have career conversations in a way that is acceptable within our culture, and yet transformational in terms of quality, breath and depth, Foote said. Adoption of MCC as the framework to enable the corporate lattice organization to take root is, in many respects, acknowledgement that the organization is at an inflection point relative to how it views and develops its talent. Having said this, each of us walks into the future backwards even if we want to go in a new direction, we are not always aware that we are defining this in relation to our past experiences. We call this the TiVo revelation. When TiVo was introduced, most thought of it as a fancy VCR. But over time, we have come to appreciate how TiVo affords a whole new, customized approach to experiencing television entertainment. Similarly with MCC, leading your organization to adopt MCCin spirit or in formwill require a solid understanding and buy-in of the urgency regarding the realities of the talent market, as well as the business benefits of embracing the new lattice paradigm. In other words, you need to answer

the question: Why should I care? using the language and discipline of business. While that answer will look different for each organization, we think that maintaining industry advantage will depend largely on whether you ask that question.

The Elephant in the Room


With the business challenge well articulated, the arguments convincing and defensible, and the course of action laid out, we are aware that not everyone recognizes that (1) there is a structural workforce shift at hand, (2) the workplace must respond in kind, and (3) now is the time and place to address this challenge. Perhaps this perspective is most effectively described by a personal experience in a local Italian restaurant with a great friend and newly retired mentor. Over a leisurely dinner, we began talking about workforce trends and mass career customization. After some goodnatured bantering back and forth, his bottom line took me aback. He asserted that successful people in business possess two qualities: They are talented and they work really hard. And anything that undermines these two characteristics will ruin business. While we agreed that talent and hard work are essential, I believe the reality is that the career journey of todays knowledge workers will not look like his. As his wife of 40 years pointed out, The reason that you were so successful is because you had the talent and you worked really hard at one thing your career. The other elements of life during those years were handled by me. The division of labor at home for their three married children, in their 30s and parents of young children, is totally different. Take their oldest son as an example. He is talented and works very hard and so does his neurologist wife. The difference is that they do not work hard singularly at their careers. They work hard as a team, traversing home and work responsibilities. The point? The delineation between the home front and the work front has become
61

Talent

irreversibly blurred. While the couple I had dinner with typified the 17 percent of the U.S. population that categorize the traditional workforce, their children characterize the 83 percent who do not. And this is not likely to change. We believe its time to start thinking and creating solutions to deal with this new reality structurally and systemically. And thats what building a corporate lattice organization is about. Originally published in Deloitte Review #3, 2008 About the authors Cathy Benko is vice chairman and chief talent officer for Deloitte LLP. Anne Weisberg is a director in Deloittes talent organization, with Deloitte Services LP. They are co-authors of Mass Career Customization: Aligning the Workplace with Todays Nontraditional Workforce (Harvard Business School Press, 2007).

Endnotes
1. See, e.g., Comptroller Generals Forum, Engaging and Retaining Older Workers (GAO, February 2007); Ken Dychtwald, Robert Morison, and Tamara J. Erickson, Workforce Crisis: How to Beat the Coming Shortage of Skills and Talent (Boston: Harvard Business School Press, 2006); Realizing an Experience Dividend, http//civicventures.org/publications/booklets, accessed October 4, 2007; AARP, Workforce Trends, http://www.aarp. org/money/careers/employerresourcecenter/ trends; Ken Dychtwald, Tamara Erickson, and Bob Morison, Its Time to Retire Retirement (Harvard Business Review, March 2004) 2. Mark Penn, Microtrends: The Small Forces Behind Tomorrows Big Changes (Twelve, 2007) p. xi 3. Phyllis Moen and Patricia Roehling, The Career Mystique: Cracks in the American Dream (Lanham, MD: Rowman & Littlefield, 2005) 4. U.S. Patent Pending 5. Poll taken during Mass Career Customization DeBrief, September 28, 2007 6. Interviews conducted by the authors, 2007 7. Cathleen Benko and Anne Weisberg, Mass Career Customization: Aligning the Workplace with Todays Nontraditional Workforce (Harvard Business School Press, 2007) pp. 110-115 8. Ibid 9. Paul Taylor, Cary Funk, Peyton Craighill, Public Says American Work Life Is Worsening, But Most Workers Remain Satisfied with Their Jobs (Pew Research Center, September 2006) 10. Dychtwald, et al, Workforce Crisis p.6 11. The Economist, The world is our oyster the talent war has gone global and so have the talent shortages, within The Search for Talent: Why Its Getting Harder to Find (Economist Special Report, October 7, 2006) 12. The Economist, The battle for brainpower, within The Search for Talent: Why Its Getting Harder to Find (Economist Special Report, October 7, 2006); Number of Jobs Held, Labor Market Activity, and Earnings Growth Among the Youngest Baby Boomers: Results from a Longitudinal Study, Bureau of Labor Statistics, August 25, 2006 (USDL 06-1496)

62

The Talent Paradox: A 21st century talent and leadership agenda

13. The Economist, The Search for Talent, Why Its Getting Harder to Find (Economist Special Report, October 7, 2006) 14. Leigh Buchanan, The Young and the Restful, Harvard Business Review, November 2004; Catalyst, The Next Generation: Todays Professionals, Tomorrows Leaders (New York: Catalyst, 2001) 15. Catalyst, Two Careers, One Marriage: Making It Work in the Workplace (New York: Catalyst 1998); US Bureau of Labor Statistics, Annual Social and Economic Supplement: Current Population Survey (Washington, DC: GPO, 2005) 16. U.S. Department of Education, National Center for Education Statistics, Table 246. Degrees Conferred by Degree-Granting Institutions, by Level of Degree and Sex of Student: Selected Years, 1869-70 Through 2013-14, Digest of Education Statistics: 2005, June 2006, http//nces. ed.gov/programs/digest/d05/tables/dt05_246.asp 17. Lisa Belkin, Lifes Work: Flex Time for the Rest of Us, New York Times, December 17, 2006 18. Marilyn Elias, The Family-First Generation, USA Today, December 12, 2004. For more on younger generations expectations, see Orange, Aspiring Law and Business Professionals Orientations to Work and Family Life, and Moen and Roehling, The Career Mystique 19. Eric Richert and David Rush, How New Infrastructure Provided Flexibility, Controlled Cost and Empowered Workers at Sun Microsystems, Journal of Corporate Real Estate 7, no. 3 (2005) pp. 271-279 20. James Goodnight, Ask James Goodnight: The Founder of SAS Explains How to Be Progressive on a Budget, Inc., June 2006, http://www.inc.com/magazine/20060601/ handson-ask-the-big-wig.html 21. See e.g. Lotte Bailyn, Joyce K. Fletcher, and Deborah Kolb, Unexpected Connections: Considering Employees Personal Lives Can Revitalize Your Business, in Inventing the Organizations of the 21st Century, edited by Thomas W. Malone, Robert Laubacher, and Michael S. Scott Morton (Cambridge, MA: The MIT Press, 2003); Richard B. Freeman and Joel Rogers, What Workers Want (Ithaca, NY:Cornell University Press, 1999); Catalyst, Two Careers, One Marriage: Making it Work in the Workplace (New York: Catalyst, 1998) 22. American Institute of Certified Public Accountants, Work/life & Womens Initiatives

Executive Committee, AICPA Work/Life and Womens Initiatives 2004 Research (New York: American Institute of Certified Public Accountants, 2004) p. 8 23. Towards Effective Management of Associate Mobility: A Status Report on Attrition, (National Association of Law Placement Foundation for Law Career Research and Education), www.nalpfoundation.org

63

Talent

The Corporate Lattice


A strategic response to the changing world of work
By Cathy Benko, molly Anderson and Suzanne vickberg > Illustration by Dan Page

64

The Talent Paradox: A 21st century talent and leadership agenda

he corporate ladder has been the de facto standard shaping the way companies sometimes consciously and sometimes not have operated for the past century. But deeply held ladder assumptions are limiting our ability to respond to the changing corporate landscape. Continuing to invest for the future using yesterdays blueprint is futile. Whats needed is a new model for driving agility and high performance in todays world of work. The corporate ladder model took hold at a time when the central business goal in the emerging industrial economy was achieving economies of scale. The ladder proffers a worldview in which power, rewards and access to information are tied to the rung each employee occupies. Its hierarchical structure governs how information flows and whose ideas matter. It defines career success as a linear climb to the top. Ultimately, the ladders one-size-fits-all approach assumes employees are more alike than different, and want and need similar things to deliver results. But the workplace isnt what it used to be. While 60 percent of corporate value creation once depended on hard assets, now more than 85 percent relies on the intangible assets of brand, people and intellectual property.1 Organizational structures are, on average, 25 percent flatter than they were 20 years ago.2 Technological advances, globalization and the rise of knowledge work have resulted in work and workers being less bound to physical locations or set hours; teams are often dispersed across locations and time zones. And the work itself is less routine, with the growth

in nonroutine tasks outpacing routine tasks by 20 percentage points since 1960.3 Project work, one example of nonroutine activity, has increased 40-fold over the past 20 years, making collaboration and teamwork more important than ever.4 The workforce isnt what it used to be either. Family structures have changed markedly, with a mere one in six U.S. families mirroring the traditional structure upon which the ladder model was built, where Dad works and Mom stays at home. Women now constitute half the U.S. workforce and are the primary breadwinners in 40 percent of U.S. households.5 Men in dual-career couples now report one-third greater work-life conflict than women.6 Younger generations are bringing different attitudes about what it takes to motivate them at the same time older workers are looking for flexible options to stay in the labor market. In just about every way, employees are more diverse than ever including their very definitions of success. The convergence of these trends, summarized in Figure 1, irreversibly alters the corporate landscape.

From Ladder to Lattice

he corporate lattice model, in contrast to the traditional ladder, is more adaptive, and therefore better suited to align with the changing needs, norms and expectations of todays workplace. In mathematics, a lattice is a three-dimensional structure that extends infinitely in any direction. In the real world,

Figure 1. Forces driving the changing world of work

Rise in nontraditional families Converging expectations of men and women Flattened hierarchies Shortage of critical talent Evolving needs of generations Virtual, connected workplace Multicultural workforce

Changing world of work

65

Talent

lattice structures are evident everywhere from a gardens wooden trellis to the metalwork of the Eiffel Tower to the emerging matrix structures and network models companies are adopting. The corporate lattice metaphor signals a shift in mindset and outlook as we cross the chasm from the Industrial Age to the knowledge economy. It represents the multidirectional, flexible and expansive nature of how successful organizations work today. And it marks an inflection point in the ways careers are built, work is done and participation in organizations is fostered. Collectively, we call these changed ways of thinking and acting the lattice ways as shown in Figure 2.
Figure 2. Three lattice ways

rs ree ca ild Bu te or k ipa W r tic Pa

lattice ways to build careers.


The U.S. Department of Education estimates that 60 percent of all new jobs in the early 21st century will require skills that only 20 percent of the current workforce possesses.7 Keeping pace with todays rapid rate of change and skills needed to succeed is an important way companies become more agile. It requires a continual focus on growth and development. Yet todays flatter organizational structures mean companies have fewer options for developing their people by moving them up. In response, lattice organizations are broadening career pathways (shown in Figure 3) to include lateral and diagonal directions and planned descents along which people can grow. Career moves across organizational silos make
66

employees more versatile, increasing strategic flexibility. Changes in how careers are built are benefitting workers as well. People know that keeping their skills relevant in a fast-changing marketplace is a key to job security. And of employees who are looking to change jobs, almost half cite a desire for better career growth, making a strong focus on development and expanded career options critical levers in attracting and retaining todays talent.8 Expanded career options also enable people to find more ways to fit their lives into their work and their work into their liveswhat we call career-life fitanother way employees across both genders and generations benefit. The global law firm Orrick, Herrington, Sutcliffe LLP illustrates how lattice ways to build careers is playing out. Orrick realized that launching a new career model could help address two key issues: client dissatisfaction with the price-value ratios of legal service providers and significant changes in the expectations of law school graduates who want flexible career options. Orricks model now provides a variety of career options rather than a single, linear path to partner.9 The model recognizes that moving forward in ones development is not limited to moving upward on the traditional career ladder. There are many ways of progressing ones career and contributing meaningful value to the organization, says Laura Saklad, chief lawyer development officer.10 Advancement is now performance-based rather than tenurebased with specific core competency criteria to guide decisions. By aligning promotions and corresponding billing rate increases with the lawyers skill set and level of experience, client value is better aligned with fees. And, by basing promotions on competency development, the pace at which each career develops is individualized since people attain various levels of proficiency at different rates. A custom career track allows individuals to tailor their development based on their career interests and goals as well as their life needs. Compensation also has changed to enable the new approach.

The Talent Paradox: A 21st century talent and leadership agenda

Figure 3. Comparison of ladder and lattice career paths

Ladder progression

Lattice pathways

Examples of linear career paths

Examples of more varied paths for growth and development

Rather than base bonuses on billable hours or firm profitability, bonuses are based on what matters most to clients quality, efficiency and contribution. All of these changes improve the value clients receive.

lattice ways work is done.


The lattice also represents the transformation from work being a place you go during set hours each work day to something you do in a dynamic, increasingly virtual workplace. Technology has enabled new possibilities for the where, when and how of work. Globalization, virtualization, modular job and process designs, and team-based project work, among other workplace advances, leverage ubiquitous and expansive technologies from broadband to Web 2.0 in innovative ways. These technologies both respond to and drive the changing world of work. The benefits of virtual work are significant and range from lower real estate costs to greater workforce productivity and retention to shorter cycle times, improved business continuity and even a greener footprint from less commuting. Individuals gain too with increased flexibility and more choices for when and where they do their work.

Thomson Reuters transformation of the decentralized finance functions of more than 40 companies in their portfolio is a good example of lattice ways to work in action. Dubbed the FinancePlus transformation, this effort redesigned work to be performed in shared service centers around the world by global teams rather than individuals. As a result, knowledge must be transparently shared on common platforms that everyone can access. In the past, there were seldom more than a few select people who had the total picture of any particular business. Now entire teams understand how things work, leading to greater job modularity. Projects can be staffed in multiple ways based on the needs of the moment, making finance more agile. While beneficial, these new ways of working were foreign to many managers and some challenges did surface. For example, managers in Thomson Reuters U.K.-based sales and trading division were accustomed to having the people who reported to them sitting together in the same office, in the line of sight, but now 40 percent of staff live outside the country in which their manager works.11 Says David Turner, executive vice president and chief financial officer of Thomson Reuters Markets: At first it didnt make sense to people
67

Talent

that managers could lead people in other locations or that we could build a team culture across geographies. Over time, employees realized if you utilize technologies and different ways of communicating, people can be just as effective remotely as they can sitting next door to you.12 The FinancePlus transition to service bureaus has thus far yielded approximately $50 million in annual savings.13 The transformation has helped leaders make better decisions, delivered improved forecasting and planning, and strengthened regulatory compliance functions as well. Employee surveys also show that a clear majority (80 percent) rate the companys flexibility efforts favorably thats five points higher than the average at other highperforming firms.14

lattice ways to participate.


With its strong horizontal as well as diagonal and vertical supports, the visual image of a lattice reflects organizational relationships, interactions and communications that function in a network-like fashion unconstrained by top-down hierarchy. Lattice organizations are sharing information transparently, creating communities and providing more collaborative, inclusive and meaningful options for employees to contribute regardless of their level on the organizational chart. New ways of fostering participation are helping organizations meet a new challenge the rise of nonroutine and project-based work, which requires greater collaboration and is more difficult to achieve as teams become more dispersed and virtual. Lattice organizations are finding ways of working across the invisible borders of geography, hierarchy and function. As they realize that good ideas can come from anywhere, these organizations are reaping the rewards of increased innovation. Thats what AT&T found with one of its social media experiments. John Donovan, AT&Ts chief technology officer, was looking for a nonhierarchical approach to harness knowledge and creativity.15 Leveraging social media, Donovan created a mass participation

approach to innovation featuring a Web site that allows anyone to contribute an idea, become a collaborator on someone elses idea, provide encouragement and critical feedback, assess a concepts marketability, challenge its engineering and affordability, and the like. Each employee is able to vote on the caliber of the insights and rate additional postings of suggestions and comments, earning the contributors reputation points. This is meritocracy at its best a highly diverse set of people, in every sense of the word, crowdsourcing and crowdstorming, says Donovan. Individuals can customize their level of participation from merely being a spectator to actively participating and racking up reputation points. And, as Donovan says, In an American Idoltype fashion, unknown talent is revealed and great innovations can see the light of day. By the end of its third quarter, the site had more than 24,000 members, 2,000 ideas, and over a million page views and its still growing.16 Such results are a strong measure of participations role in generating greater recognition for individuals and greater engagement in the business overall. The first seasons winners have been funded and are moving from PowerPoint to prototype.

Why Lattice Thinking Matters

hile efforts to advance a company in any one of these lattice ways are beneficial, the power of the lattice is amplified by the compounding effect that occurs when these ways of thinking and acting reinforce one another to improve productivity, innovation and the ability to develop, retain and engage the right kinds of talent. Table 1 illustrates the connections between the lattice ways, and the case of Cisco illustrates how all three lattice ways work in tandem. CEO John Chambers became a fervent believer in reinventing the company after the dot-com boom went bust, and while he didnt expressly set out to create a lattice organization, Cisco became lattice-like in both its structure and culture.

68

The Talent Paradox: A 21st century talent and leadership agenda

Table 1. Connections between lattice ways

Careers

Work
Changes to work and careers propel a shift toward results and away from face time

Participation
New forms of participation offer more options to learn, build relationships, and build personal brands Virtual collaboration and networks enable redesigned work processes

Careers

Work

Career-life options expand along with anytime, anywhere work options Transparency enables more candor about career options and how they t with life choices Work increasingly relies on exible teams that need to collaborate transparently

Participation

From me to we.
The cornerstone of Ciscos transformation was its move from an individualistic culture to one based on collaboration, which lies at the heart of lattice ways to work and participate. In 2002, Cisco began to implement a system of cross-functional councils and boards designed to both speed up the companys responsiveness to market conditions and push decision-making down to lower levels of the organization. If you look at how most companies are organized, they are built around an informational discontinuity where just a few people at the top are presumed to have access to vast amounts of knowledge, says Brian Schipper, senior vice president of human resources. In a world where most people can access information about any subject in less than five minutes, this notion is outdated.17 But Cisco quickly learned that it was not enough to simply put smart, capable leaders on the councils and boards. They needed to identify clear processes and outcomes in order to be successful. So they created a taxonomy for councils, defining a process for developing a vision, a strategy and an execution plan for each. It stressed mutual accountability and teamwork. And to make sure this shift

was given the needed focus and commitment, reward systems for executives were changed to recognize collaboration Chambers announced that 30 percent of senior executives bonuses would be based on how well they collaborated with others, a structural change in the reward system designed to support the larger cultural change already going on.18 Within a few years, the culture began to change. We really started to see the benefit after our initial improvements, says Randy Pond, executive vice president of operations, systems and processes. We were starting to crosspollinate knowledge and appropriately drive broader thinking. We began to get a relevant marketing comment out of the manufacturing guy or a supplychain comment out of an engineering person.19 And the councils and boards are expanding leaders capabilities too. People have opportunities for natural leadership and development in ways that we couldnt provide before, says Susan Monaghan, former vice president of employee engagement. Through experience, we are changing the way people lead. People are learning something that they can never unlearn. Over time, this changes the face of the culture.20

69

Talent

lattice leadership development.


As collaborating in this way became the norm, Cisco realized it needed to develop leadership talent differently. It began to make lateral moves an important part of executive development to build the breadth of business perspectives that collaboration requires. The story of Ana Corrales, vice president of global business operations, provides an example.21 She joined Cisco in 1996 as a manufacturing planner to leverage her expertise in operations research. She then made a series of horizontal moves that gave her a broad portfolio of experience. Her move to manufacturing plant operations netted her people leadership skills to add to her already formidable analytical strengths. Additional moves took her to materials acquisition at the front end of the supply chain, to finance, to customer service, and to working with sales taking customer orders and processing them. Today Corrales is a vice president in charge of business models, a role that requires a cross-functional perspective. As Corrales experience illustrates, Cisco is engineering custom development paths for its high-potential employees that include lateral moves to build future skills. Top leaders now conduct an annual review identifying who is ready to move and which positions would most benefit the individual and the

organization. And to make its model scalable and repeatable, Cisco learned that it needs to teach leaders how to do a better job of talking with their people about career growth and development. A starting point was to define a set of leadership competencies so that there would be a common language for talking about career options choices to move horizontally as well as vertically. The system pushes hard to make sure personalized career conversations are effectively discussing career interests and exploring potential moves in all directions.

rethinking the workspace.


Ciscos focus was not limited to executive levels it has also changed its workplace to enable global operations with virtual, dispersed teams and, in the process, give employees more choice in how they work. In 2003 it began introducing what it calls the collaborative, connected workplace, which gives all employees a greater ability to customize how they accomplish work through a broad choice of workspaces and virtual work options. Cisco, as a manufacturer of an array of cutting-edge tools to catalyze mass participation, employs a rich set of technologies to enable collaboration including wikis, video blogging and social networking. The collaborative, connected workplace has increased transparency, an

In one high-technology company with a lattice career model, lateral moves are common and the company works hard to value contributions regardless of which rung on the ladder an employee occupies. But the CEO only sends out recognition communications to celebrate vertical promotions rather than a mix of promotions and significant accomplishments.
70

The Talent Paradox: A 21st century talent and leadership agenda

ongoing emphasis in Ciscos effort to broaden how participation happens. If you dont drive transparency, you create blockages for the knowledge flow in the business, and then collaboration does not work, says Pond. Collaboration fundamentally cant work without transparency.22 Cisco emerged from the recession of the early 2000s more profitable than ever, and it is now one of the top 100 largest companies in the world in terms of market capitalization and revenue. Beyond changing a formerly topdown culture and providing more avenues for employees to engage, Cisco estimates that its efforts to increase collaboration have generated a business impact of close to $700 million, a significant amount even for such a large company.23 Efforts to help workers be more mobile have generated an extra hour of productivity per day per employee. A 2008 study of approximately 2,000 teleworkers at Cisco in five global regions estimated $277 million in annual productivity savings, more than 47,000 metric tons of greenhouse gas emissions avoided, and employee savings in gasoline costs of more than $10 million.24 The company is also widely regarded as an employer of choice.25

Thriving in the Changing World of Work

he lattice model reframes workplace suppositions, providing a framework to organize and advance a companys existing incremental efforts into a comprehensive, strategic responseand mindset shiftto the changing world of work. To advance a lattice posture, leaders can adopt the following strategies:

connect the dots.


Many organizations recognize the individual impact of workplace and workforce trends that are transforming the business world, but until now the convergence of these trends has been obscured. The result has been a mix of

reactive solutions designed to address a few of the trends and often in point-solution fashion. This approach has increased the proliferation of programs while falling short of the desired results. Flexible work arrangements, for example, are typical program investments designed to retain valued employees but they often fail to do so. Studies by the American Institute of Certified Public Accountants have found that while the majority of public accounting firms have been aggressive in implementing flexible work arrangement policies over the years, the two most prevalent reasons why employees leave are still working conditions (schedule, hours, assignments) and work-life issues.26 Why? Studies show individuals who initiate flexible work arrangements often feel stigmatized as an exception to the corporate ladder norm. For such programs to really work, the norm itself needs to change. The corporate lattice model opens up the aperture of what comprises acceptable norms. The importance of making connections between workplace trends further reinforces why Ciscos move toward a more collaborative culture couldnt stop at just creating councils and boards. To be successful, these bodies needed guidance on how to develop and operate collaboratively, as well as aligned reward mechanisms, transformed leadership development methods, and even reconfigurable workspace arrangements. Organizations also must ensure that they are connecting the dots between messages and actions, modeling the change they want to see. For example, in one high-technology company with a lattice career model, lateral moves are common and the company works hard to value contributions regardless of which rung on the ladder an employee occupies. But the CEO only sends out recognition communications to celebrate vertical promotions rather than a mix of promotions and significant accomplishments. This action makes employees unclear what the company really values: ladder or lattice?

71

Talent

adopt an options orientation.


The name of the game in this new world of work is options. In financial investments, options provide a hedge against market uncertainty, providing flexibility to buy or sell at a later time when more is known about market conditions. Similarly, the lattice model employs an options orientation to give businesses a hedge against future uncertainty. Options range from when, where and how work is performed to various ways in which people can access information, offer input and collaborate across geographical, hierarchical and functional boundaries. The fast-paced, technology-driven, information-heavy nature of work today means that organizations must have the agility to react and respond to the changing landscape and options create such strategic flexibility. The Thomson Reuters finance organization example illustrates how the virtualization of work processes on common systems paired with changes to physical office workspace provided more flexibility for both the organization and its people. An options orientation also benefits the bottom line. Corporate performance increasingly depends on how much discretionary effort individuals put into their work, often referred to as employee engagement, as shown in Table 2.27 Yet peoples motivationswhat drives them to put in discretionary effortare more varied than ever, as are their views of what success means for them. How can companies respond to this high level of variability? Similar to the way mass product customization lets companies cost-effectively offer tailored options to customers, lattice

organizations customize the workplace. Companies define the parameters of choice and let employees choose from defined options. When employees have a greater say in what their work experience is, they are more engaged and perform better. Deloitte has seen a great payoff from adopting a lattice mindset. Investing in its development has affirmed the power of offering structured options in lattice ways to build careers, to work, and to foster participation as it relates to engaging our people. Our results show that those experiencing lattice ways are twice as likely to be engaged as those who are not, as shown in Figure 4.28

measure what matters.


As the when, where and how of work expands to accommodate an increasingly virtual and global workplace, it is rendering face time less relevant. While time clocked in the office has never been a particularly effective performance metric, it has been a way to account for peoples time and whereabouts. But it is fast becoming an irrelevant proxy for contributions. Instead, organizations need to provide their managers with the training, tools and mindset to value productivity and contributions not just activity. In many organizations, time put in at the office is seen as a valid measure of commitment and competence, notes Lotte Bailyn, a professor at the MIT Sloan School of Management. There can also be deep-seated beliefs about what is considered real work. And these beliefs often overemphasize technical tasks and underemphasize relational tasks.

Table 2. Engagement and bottom line benets

Companies with higher engagement deliver better results than those with lower engagement

Earnings-per-share growth is 160 percent higher Return on assets is 100 percent higher Revenue growth is 150 percent higher Protability is 40 percent higher Productivity is 78 percent higher

72

The Talent Paradox: A 21st century talent and leadership agenda

Figure 4. Lattice ways and engagement

Those experiencing lattice ways are far more likely to be engaged % who are engaged 100% 80% 60% 40% 20% 0% Build careers Work Participate No Yes

She adds that another common challenge is the practice of never presenting a problem until someone has a solution. Then people arent concerned ever with preventing problems, but just with heroically solving problems, even if they cause them by themselves. These assumptions about very basic things get in the way of changing how work happens.29 Companies shifting to a corporate lattice model are redefining meaningful contribution. Orrick provides a good example. The firm shifted from evaluating attorneys on quantifiables like billable hoursa measure of inputto items like quality, efficiency and client satisfaction measures of output. And AT&Ts use of reputation points to represent peoples level of participation also illustrates the redefinition of contribution. The level of competitive intensity has doubled in recent years. Typical careers now zig and zag. Work has shifted from where you go to what you do. And participation in organizational life has gone from top-down to all-in. Together these changes signal the end

of traditional assumptions about what it takes to achieve strategic flexibility and sustain high performance. The corporate lattice model both accelerates this transformation and illuminates the road ahead. Originally published in Deloitte Review #8, 2011 About the authors Cathy Benko is a vice chairman and chief talent officer, Deloitte LLP, and best-selling author. She is co-author of The Corporate Lattice and Mass Career Customization: Aligning the Workplace with Todays Nontraditional Workforce. Molly Anderson is a director with Deloitte Services LP and co-author of The Corporate Lattice. Suzanne Vickberg, Ph.D., is a senior manager with Deloitte Services LP.

73

Talent

Endnotes
1. Douglas Elmendorf, Gregory Mankiw, and Lawrence H. Summers, Brookings Papers on Economic Activity: Spring 2008 (Washington, DC: Brookings Institution Press, 2008). 2. Raghuram Rajan and Julie Wulf, The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies, National Bureau of Economic Research Working Paper Series, Working Paper #9633, April 2003, http://www.nber. org/papers/w9633 (accessed March 2, 2009). 3. Gene Grossman and Esteban Rossi-Hansberg, The Rise of Offshoring: Its Not Wine for Cloth Anymore, Proceedings (Kansas City: Federal Reserve Bank of Kansas City, 2006). 4. F. Warren McFarlan and Cathy Benko, Managing a Growth Culture: How CEOs Can Initiate and Monitor a Successful Growth-Project Culture, Strategy & Leadership 32, no. 1 (2004): 3442. 5. Heather Boushey and Ann OLeary, eds., The Shriver Report: A Womans Nation Changes Everything (Washington, DC: Center for American Progress, 2009), 32; Bureau of Labor Statistics, Current Employment Statistics (National), October 2009, tables B-3 and B-4, ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb3.txt. 6. Families and Work Institute, Nations Study of the Changing Workforce 2008; US Department of Labor, Quality of Employment Survey, 1977 as cited in Ellen Galinsky, Kerstin Aumann, and James Bond, Times are Changing: Gender and Generation at Work and at Home (New York: Families and Work Institute, 2009), 19. 7. Norman R. Augustine, Is America Falling Off the Flat Earth? National Academy of Sciences, National Academy of Engineering, Institute of Medicine (Washington, D.C.: National Academies Press, 2007), http://www.nap.edu/ openbook.php?record_id=12021&page=37. 8. Anne Fisher, Want a New Job? Give Your Old One a Makeover, Fortune, January 5, 2007, http://money.cnn.com/2007/01/03/news/ economy/annie_newjob.fortune/index.htm. 9. Internal document, Orricks Talent Model: Your Future, 2009. 10. Interview with Laura Saklad, chief lawyer development officer, Orrick, Herrington, Sutcliffe LLP, by Cathy Benko and Molly Anderson, December, 17, 2009. 11. Interview with Matthew Burkley, chief financial officer, Thomson Reuters sales and trading
74

division, by Cathy Benko, August 18, 2009, with follow-up interview on August 29, 2009. 12. Interview with David Turner, executive vice president and current chief financial officer, Thomson Reuters Markets, by Cathy Benko and Molly Anderson, September 29, 2009. 13. 2006 ThomsonPlus and Q2 Financial Review including Finance Plus. 14. Thomson Reuters 2008 Employee Survey. 15. Interview with John Donovan, chief technology officer, AT&T, by Cathy Benko, July 23, 2009 and follow up interview on August 20, 2009. 16. Marc Bien, spokesperson, AT&T, correspondence with Cathy Benko, December 29, 2009. 17. Interview with Brian Schipper, senior vice president of human resources, Cisco, and Susan Monaghan, vice president of employee engagement, Cisco, by Cathy Benko, Thomas Galizia, and Molly Anderson, September 28, 2009. 18. Peter Burrows, Ciscos Comeback, BusinessWeek, November 24, 2003, http:// www.businessweek.com/magazine/ content/03_47/b3859008.htm. 19. Interview with Randy Pond, executive vice president of operations, systems and processes, Cisco, by Cathy Benko, Molly Anderson, and Thomas Galizia, July 29, 2009. 20. Interview with Brian Schipper and Susan Monaghan, July 29, 2009. 21. Interview with Ana Corrales, vice president, global business operations, by Molly Anderson and Thomas Galizia, December 22, 2009. 22. Interview with Randy Pond, July 29, 2009. 23. Marisa Chancellor, Web 2.0 Collaboration in the Enterprise (keynote address, N2Y4 NetSquared conference, San Jose, California, May 26, 2009), http://www. netsquared.org/blog/amy-sample-ward/ n2y4-marisa-chancellor-cisco-systems-keynote. 24. Cisco Study Finds Telecommuting Significantly Increases Employee Productivity, Work-Life Flexibility and Job Satisfaction, Cisco press release, June 26, 2009, http://newsroom. cisco.com/dlls/2009/prod_062609.html. 25. 100 Best Companies to Work for 2009, Fortune, 2009, http://money.cnn.com/ magazines/fortune/bestcompanies/2009/ full_list/; The DiversityInc Top 10 Global Diversity Companies List, DiversityInc, 2009, http://diversityinc.com/content/1757/

The Talent Paradox: A 21st century talent and leadership agenda

article/5862/?The_DiversityInc_Top_10_Global_Diversity_Companies_List; Working Mother 100 Best Companies 2009: Cisco, Working Mother, 2009, http://www.workingmother.com/ BestCompanies/work-life-balance/2009/08/ cisco; Best Places to Launch a Career 2009, BusinessWeek, 2009, http:// bwnt.businessweek. com/interactive_reports/career_launch_2009/. 26. American Institute of Certified Public Accountants, Work/Life & Womens Initiatives Executive Committee, AIPCA Work/Life & Womens Initiatives 2004 Research (New York: American Institute of Certified Public Accountants, 2004), 8. 27. Bryant Ott, Investors Take Note: Engagement Boosts Earnings, Gallup Management Journal, June 14, 2007, http://gmj.gallup.com/ content/27799/investorstake-note-engagementboosts-earnings.aspx; Employee Engagement:

Stories of Success (Brisbane, Australia: JRA, November 2008), http://www.jra.co.nz/storiesofsuccess.aspx; Tough Decisions in a Downturn Dont Have to Lead to Disengaged Employees, BusinessWire, August 14, 2009, http://www.businesswire.com/news/google/20090812006251/ en: Understanding the True Cost of Disengagement, Hewitt Quarterly Asia Pacific, July 2007, http://www.hewittassociates.com/ Intl/AP/en-AP/KnowledgeCenter/Magazine/ HQ_18/articles/cost-disaggrement.html. 28. Statistical analysis of Deloittes annual personnel survey, March 15,2010. 29. Interview with Lotte Bailyn, professor of management, MIT, by Molly Anderson, Anne Weisberg, and Laura Stokker, July 15, 2009.

75

Talent

76

The Talent Paradox: A 21st century talent and leadership agenda

Culture and the Myth of the Black Box


Why you canand should manage your companys culture
By Stephanie Quappe, David Samso-Aparici and Jon Warshawsky > Illustration by Anthony Freda

Why Culture Matters

ulture tends to be something of an enigma in the study of companies. Everyone agrees over cocktails that culture is important and hopes their company has a good culture versus a bad culture. For all of its implied significance, however, cultural change tends to rate alongside tarot card reading and astrology in terms of credibility. It lurks in the unfortunate category of soft issues that leaders cant quite discard for the nagging sense that there may actually be something there, something that may hold too much importance to dismiss out of hand.

The Hard Truth


In fact, culture is not a soft issue created by cheerleading, posters or picnics. Culture can be explicitly defined, and it generally develops out of tangible (and controllable) actions within a company, not in a murky black box. Moreover, its implications for corporate performance are real and can be substantial. Research from Denison Consulting concludes that companies demonstrating higher levels of performance in key areas of corporate culture,

including adaptability, consistency, mission and involvement, deliver better results when it comes to return on assets, sales growth and increased value to shareholders.1 This finding builds on J. Kotters and James Hesketts landmark 1992 study,2 which found that, over a 10-year period, companies that intentionally managed their cultures outperformed similar companies that did not. Their findings included revenue growth of 682 percent versus 166 percent; stock price increases of 901 percent versus 74 percent; net income growth of 756 percent versus 1 percent; and job growth of 282 percent versus 36 percent.3 Additionally, companies listed on Fortunes 100 Best Companies to Work For further demonstrate that those with well-managed cultures significantly outperform the S&P 500. Culture similarly can take on increased importance in large corporate mergers and acquisitions, where an estimated 30 percent of integrations get stuck or fail outright as a result of cultural issues. Disparities in corporate culture, as well as the tendency for one culture to become dominant, create a win-or-lose mindset that injects a good dose of mistrust into an already complicated process.4

77

Talent

Culture as a Driver of Business Results


Beyond the hard numbers, culture can play a prominent role in several issues that top business leaders agendas. Ethics, which has become something of an obsession in the wake of the Enron fiasco and the resultant SarbanesOxley Act, hinges on effective controls, proper systems, and, most important, a culture that values ethical behavior and discourages dishonesty. If ethics can be defined as what one chooses to do when no one else is watching, then culture can be a significant predictor of ethical or unethical behavior. Building systems and controls as a sort of scaffolding around a dysfunctional company can be an (expensive) exercise in futility. Business publications also are replete with stories about the war for talent and innovation as a driver for growth. Jeff Rosenthal and Mary Ann Masarech put a finer point on it: Organizations depend on innovation for growth and high performance, which in turn depend on employee initiative, risk taking and

trust-all qualities that are either squelched or nurtured by an organizations climate.5 Moreover, they add, people are increasingly looking for more from their employment than a paycheck. Some sense of purpose and camaraderie, even joy, fit into many workers notion of a great job, and projected demographic trends suggest that retaining top talent will become increasingly important as the talent pool, and working-age population as a percentage of the total population, diminishes. If a company wants to attract and retain the best and the brightest, culture once again emerges as something that truly matters. And as for the genius of innovation, clearly the one percent spark of inspiration is nurtured by a positive culture. But the 99 percent perspiration ingredient comes from employees who love what they do, as well as where they do it, and who invest in that Holy Grail of productivity called discretionary effort. We believe that the spark and commitment of employees in these good cultures are a big part of what creates extraordinary results.

Figure 1. Expressions of a high-performance culture (outer circle)

Decisions of senior leaders and key inuences Daily interactions of employess and managers (i.e., one-on-one, in teams, and in larger forums) Messages to peers, internal customers, and suppliers Individual decisions regarding discretionary effort Statements and practices

BEHAVIORS
Resources invested (i.e., time, money, and emotional labor) Ofce layout Span of control Informal rewards and recognition Branding Goal setting and budgeting Reporting and measuring Human resources policies/practices Communication and employee feedback

VALUES AND BELIEFS

SYMBOLS Business Strategy

SYSTEMS

Compensation Organization

78

The Talent Paradox: A 21st century talent and leadership agenda

not a Roll of the Dice


The crux of it is this: A high-performance culture can be a competitive weapon that leaders can actively manage. Culture should not be something that simply happens and through a fortuitous roll of the dice turns out in a way that works for us. It is the product of behaviors, symbols and processes which should be controllable and contribute to or detract from a companys performance.

among all of these elements-inherent values and beliefs, visible systems, behaviors, and symbols-set against the backdrop of business strategy represents a companys culture.

Do As I Say...
In a high-performance culture, values and their visible expression in behaviors, symbols and systems are inextricably connected. It is not enough to focus on systems in isolation or print more posters about values with no credible incentive for behavioral change. Symbols are equally integral to establishing and maintaining culture. How many employees get mixed messages when the companys new cost-savings initiative is promoted during an expensive corporate event? Or worse, during an event they are not invited to attend! The actual culture of a company is most often revealed when observing how individuals approach and complete tasks and activities. This depends on decisions made in line with business strategy and can sometimes differ from officially declared values. As discussed above, how employees choose to expend discretionary effort on behalf of the company is a direct reflection of the culture, either high-performing or not. Consider another common scenario: A company implements the latest human resources information system (HRIS) or enterprise resource planning (ERP) system only to find employees resisting the new way of doing business. The clash becomes much easier to understand when viewed in light of the inherent behaviors and symbols of the company, which, unless they were actively changed, are (surprise!) still supporting and rewarding the old organizational structure. This is where systems and process change need to go handin-hand with intended behavioral change. Efforts to change culture solely through recruiting or a flashy communications campaign often miss the point, as do the frequent horror stories about companies implementing performance-tracking software to solve the culture problem. Theres usually more to the

Anatomy of a HighPerformance Culture

veryone wants a high-performance culture that gets the job done while attracting the best and the brightest. But just what is it? Not all definitions agree, but behaviors, symbols and processes are visible manifestations of a companys culture. A high-performance culture is an integrated set of management processes focused on extraordinary performance, according to Dr. John Sullivan, professor at San Francisco State University and noted strategic human resources author. What its not, Sullivan adds, is a corporate culture in the traditional sense, encompassing such things as values and beliefs.6 When Kotter and Heskett examined the causality of corporate culture and performance in the late 80s, they divided culture into two parts: (1) the pattern of shared values and beliefs that helps individuals understand organizational functioning (invisible) and (2) those conventions that provide them with norms of behavior (visible).7 In the authors view, because behaviors manifest themselves in such decisions as how to invest the companys resources, it makes sense to add symbols and systems (processes and infrastructure) to the equation as visible expressions of culture. In short, the model used here (Figure 1) combines Sullivans description of a high-performance culture with Kotters model while focusing on the expression of culture as a direct result of shared values and beliefs. The interplay

79

Talent

BuT WHICH Type OF CulTuRE?


Given the connection between culture and strategy, it is easy to overlook the most basic decision: Which type of high-performance culture makes sense for a company? Which type of culture best supports the business strategy? No one believes that an innovative, collegial culture would work in the military. Yet esprit de corps is synonymous with the word military, just as initiative and creativity on the battlefield often are essential to victory. Corporate leaders often fall into the trap of designating every positive attribute as one to strive for without thinking about context, purpose or overall strategy. Choosing everything is effectively a non-decision. (Everyone prefers a nurturing, collegial, responsible, zealous culture over a conniving, clock-watching, distrustful one.) Or leaders might specify incompatible attributes which will cause implementation problems as a result of again ignoring context, purpose, and strategy. Much as professional athletes focus on one sport, companies that achieve real cultural change focus on a few key attributes instead of chasing them all. Given the different positive aspects of culture that can position a company to achieve its goals, the question is how they can be integrated into day-to-day use. How can employees do the new culture? Leaders must first define the desired culture in terms of values and aspirations and then further describe it in terms of real behaviors that drive role clarity and accountability within the company. For example, if a companys culture aspires to be more collegial, employees need to know exactly what that means. If this is an aspirational behavior, then employees must not be good at it today. The company should describe what it means to be collegial through behavioral examples, both positive and negative. If an employee calls a meeting and distributes materials and an agenda in advance so team members can be prepared to discuss and interact, that may be viewed as collegial. Blindsiding the same people with a spur-of-the-moment meeting and no advance materials might not be seen as collegial. Abstract values that cannot be measured cannot be part of a cultural change program. Inconsistent values, or ones that fly in the face of recognized and tolerated behaviors, can undermine the credibility of a culture change program.

mix and companies must use the ingredients they have at their fingertips-behaviors, symbols, and systems.

Unlocking the Black Box


e believe that a high-performance culture that meshes with business strategy will result from consistent and appropriate decisions on those aspects of the company that are anything but soft: behaviors, symbols, and systems.

1. link Before you leap


Before diving into the churning waters of cultural change, its important to take a step back and question the purpose. What sort
80

of culture is most in line with the companys strategy and, as important, how does this compare to the way things are done now? How do we understand where we are today? As an example, at a Medicaid agency in the Northeast, a survey found employees giving low marks to virtually every cultural attribute, marking the distance between actual and ideal as quite large. Culture assessment tools can help to map present and desired-state culture as a way to identify a list of desired behaviors. A comparison of todays cultural attributes to those desired is often used to indicate where the biggest bang can come from when changing a companys behaviors and culture. But companies dont get paid for finishing at the top of the annual culture awards:

The Talent Paradox: A 21st century talent and leadership agenda

They meet or exceed their business objectives by gaining market share and becoming more profitable. And while culture can be influenced by outside factors (competition, industry structure technological change, for example), it also is an aspect of the company that should be managed with an eye toward improving the companys ability to meet or exceed its business objectives.8 In one case, Deloitte Consulting LLP provided a national bank with survey research results on banking industry success factors. The information was used to help the bank assess its current culture and how it worked with its business strategy. Tangible metrics were identified, among them attrition and acquisition numbers, data that can help provide important insights into deficient processes and/or strategies. This information can help suggest which cultural attributes have a direct correlation to how effectively a company is reaching its strategic goals. In the banking survey above, those customers whose attitudes toward their bank were ambivalent, and those who were vulnerable to switching, listed such items as high switching costs and location and access as leading reasons for remaining with their bank. At first blush, these seem good enough reasons and may even reflect an advantage in real estate and breadth of service. At the same time, however, the third group, the loyal customers, rated customer service as the overriding attitudinal factor. This has clear ties to behavior that reflects underlying culture. Moreover, such advantages as fees and locations are fairly easy for a competitor to emulate. But culture change doesnt occur overnight, and a bank whose culture is conducive to a better customer experience has a competitive advantage not easily copied.9 As even this brief example suggests, culture is an issue that extends well beyond the HR department. There is a danger in confusing culture with morale or any other narrow measure. We believe that culture has an enormous influence on how a company does business and in defining how a company should conduct its

business. And for culture to be competitive, it must find its source in this strategy.

2. Gather Strength and Reinforcement From Symbols and Behavior


A possibly apocryphal story relates the tale of a woman who shows up at an upscale department store and demands a refund for a set of defective tires. Of course, this store doesnt sell tires and never has. Legend has it, though, that the salesperson authorized the refund. Whether this story is true hardly matters because it is widely told, having taken on a life of its own, and the symbolism is clear: While almost every retailer has placards saying that the customer is always right, this particular department store embraced the idea in an extreme way. Reverence for all customers at this retailer requires sales associates offering handshakes following any sale, coming around the counter to hand customers their purchases, and providing their personal business cards to customers. Handshakes arent expensive, but their meaning is clear.
Say It and Show It

Great cultures arent e-mailed into existence and poster campaigns portraying the joys of collegiality arent much better. Symbols and behaviors, however, do speak loudly. In effecting cultural change, top-down and tangible are the bywords. Executives who embody the performance culture have license, in the minds of employees, to expect the same throughout their organization. Leaders should speak and do openly what supports the desired culture and be heard and seen in the process. Is the company president sitting behind his or her desk and reading status reports on customer service issues, or visiting the call center and handling the occasional call? Did the company acquire an inline skate division because the accountants thought it made sense, or is the head of marketing a weekend inline hockey player? Does the company sponsor a league?

81

Talent

Are employee ideas slipped into a suggestion box and forgotten or does the company hold live meetings to argue about the ideas? Are offices reserved for executives and cubicles for junior employees? Is someone part of a team of three, or do he and several hundred coworkers report to one manager? To some degree, every aspect of the work experience expresses the culture of the company. Context is essential and annual photo ops with the rank and file are nothing compared to executives behavior modeling in real business situations. Big-production rollouts or cafeteria style culture-building that throws in three months of coaching to solve the accountability problem are both common and superficial. Reality is what people touch, see and hear, and there is no campaign that can override a visible executive role model or a thoughtfully-designed environment that shows junior employees are valued. When misused, symbols can offer a tempting shortcut, but any change in culture requires time, effort and a learning process. The notion that a culture change team, even with executive backing, can impose a mindset on employees is flawed. Real change, cultural or otherwise, involves real debate and leader advocates. It has been said that disagreement is the key to getting agreement; without disagreement, there is no testing. Employees may fall into line, but there will be only compliance to directions given, with no commitment to the programs or their strategic intent.

So symbols can be negative, with unintended consequences, or positive and inspiring. Both are powerful and capture attention. Positive symbols can be sincere and real or humorous hyperbole. Both kinds have their place and both work to build and sustain culture change.

3. Build Support Through Organizational Systems


The way a company conducts business can play a fundamental role in defining its culture. Among the worst mistakes any company can make is to focus on the benefits of a business process and the information system that implements it in isolation. There is an inextricable link between the design of the steps involved in the collective tasks of a company and the way people work together, or apart. We have found that in well-run companies hiring takes place with an eye toward attracting people who will support and thrive in the company culture. These companies have performance management and reward systems designed around specific behaviors that complement the business strategy, not around a generic list of positive accomplishments. Systems can aid leaders in governing a company and include these important categories:
Performance Management Systems

What is rewarded gets done. Period. Performance ratings and compensation remain

mERGERS: mATCHES mADE In HEAvEnOR nOT


Mergers present a unique set of challenges on many levels, but it is cultural compatibility that is often overlooked or underestimated. Kell and Carrot found a greater incidence of successful mergers between companies in which employees displayed similar leadership styles or where the cultures tolerated different ones. They went on to note that while a companys culture can be changed at least slightly, vast change may depend on the ongoing hiring of people who represent the direction in which you are headed.
Source: Thomas Kell and Gregory T. Carrot, Culture Matters Most, Harvard Business Review, Volume 83, Issue 5; p. 22, May 2005.

82

The Talent Paradox: A 21st century talent and leadership agenda

the fundamental rewards mechanism. We have found that compensation is unfortunately also among the most sensitive areas to change in many companies. As a result, the tight links between performance and adoption of new desired behaviors are often deferred. Badly calibrated or disconnected performance and rewards systems can override virtually any other cultural imperative.
Talent Management Systems

The talent management life cycle encompasses recruiting, developing, deploying and connecting employees within a company. Each aspect helps to create and foster the attributes of the companys culture. For example, a company can actively recruit new hires based on culturally consistent, desired behaviors and reinforce these when people join the company. Among existing staff, who are the high-potential employees based on the new attributes? Which experienced employees were on board with the new culture even before it became the new culture? It is possible, and helpful, to identify both near- and long-term role backups based on new attributes; often this may involve looking to other divisions or functions. If the criteria are based on attributes and behaviors, then functional experience becomes a part of the equation, as opposed to the entire equation, for succession planning. Top-down behaviors (not e-mails, but visible actions!) can have a significant impact, as noted. Culture change should be linked to leadership assessment and development programs because leaders have the biggest impact. After all, thats why companies spend so much time seeking the right candidate for the CEO spot. If its important that the customer support and order-handling teams support the new culture, it is crucial for the management team to serve as a constant role model.
Work Systems

a certain way is not arbitrary or mandated by IT but because the company values the result. If smart, independent decision-making is a key new behavior, for example, coaching in this skill can both help employees develop better skills in this area and serve as a visible symbol of this new emphasis for the company. The converse is also true: Work systems that are implemented without regard to culture can undermine much of what leadership hopes to achieve. An ERP system implemented at an oil company, as an example, resulted in cost savings in data processing. However, it imposed customer-facing processes that reduced the companys ability to tailor the product to customer needs and constrained what had been a productive culture. Systems are so fundamental to culture that it is hardly a stretch to suggest that cultural change in the absence of in-depth process knowledge and experience is an exercise in futility. The converse also seems to hold: processes contorted to fit the latest information systems are usually a disaster-in-waiting as they affect culture. We believe this interplay among symbols, infrastructure and behavior is the key to cultural change. Deloitte Consulting experienced this firsthand at the Medicaid agency described above, where we helped to develop a Cultural Action Plan that focused on changing symbols and systems to help shape and sustain an improved culture. The plan helped the agency in its efforts to: improve its performance management system to increase accountability, customer service, and staff involvement institute a simpler process for hiring new employees use a behavioral interview guide that guides interviewers to ask candidates how they have demonstrated the desired values and behaviors in previous roles create performance expectations at all levels, signed by employees at each level and posted in a public place

Assuming that systems support the focus of the new culture, they can be helpful to explain the rationale behind the processes. They can corroborate that the reason things are done in

83

Talent

restructure reporting lines to produce a flatter, more accountable organization train staff and supervisors in the skills needed to do their jobs and to provide better guidance and direction to their staff hire a communications director to improve both internal and external communications. Beyond recruiting with an eye to the new culture, the agency made tangible changes to core characteristics, right down to its structure. While it may seem like a footnote, the public posting of performance expectations across levels represented a dramatic change in openness and accountability in an organization where these had been notable weaknesses.

4. measure Outcomes Repeatedly


Even with supportive symbols in place and systems properly aligned, a companys culture can be buffeted by competitive and technologyrelated pressures, making it periodically necessary to determine whether the company is on track. Measurement is essential, and it also can be difficult, as anyone who has administered any kind of corporate happiness survey can attest. In a high-performance culture, the most accurate metrics should be associated with outcomes. For example, suppose a company was striving for a culture that supported and shared innovation rather than one that ceded product and service ideas to the hoarding that can happen in a competitive environment. One (bad) way to measure this would be to survey everyone to find out whether they felt good about sharing ideas. A better approach, however, would be to assess how the company had done in terms of producing ideas and how those ideas had generated income for the company. Sometimes anecdotal evidence can serve as confirmation. At the Medicaid agency, symbols and systems were changed to support the new culture, and behavioral change occurred over time. But even early indications pointed to positive behavioral change. During a supervisor training session, a supervisor told of how

two staff members came to him with a concern that he had not done something according to policy, demonstrating their willingness to hold him accountable. This represented a clear behavioral change from the earlier, dysfunctional culture at the agency. Our culture has traditionally not been very performance-focused, the agency director said. The cultural transformation that we are undergoing now will not only improve employee engagement, but I also anticipate that it is going to drive employees to achieve results. For example, our claims unit has been battling a backlog that seemed insurmountable. We were able to reduce the backlog by 65 percent over the last two and a half months by focusing on performance metrics. This would never have been possible in the past. The cultural transformation has brought a shared sense of mission. Measurement also is worth attention because human behavior is notoriously difficult to predict. Even in a company that astutely manages cultural change, its rare to have addressed everything the first time out. Measurement allows for course correction and reinforcement as needed.

Not a Black Box

ommitment matters. Companies whose cultures generate commitment and support their strategies win in the marketplace. They use their talent more fully than their competitors, where cynicism, confusion, frustration, and echoes of whats in it for me? sap energy and motivation. Companies and leaders who inspire their employees find that their employees in turn inspire their customers. And just as companies that delight their employees can expect significant discretionary effort from their workforce, so, too, can these same companies expect to see significant discretionary revenue from customers willing to pay more for excellence in their interactions with a business. Positive culture leads to positive cash flow.

84

The Talent Paradox: A 21st century talent and leadership agenda

The goal in revisiting and augmenting Kotter and Hesketts model with the concepts of symbols, behaviors, and systems has been to focus attention on the visible manifestations of a high-performance culture. While recruiting the right people remains important, and a charismatic leader can be an asset, the best results have most often come in companies that consider their symbols, behaviors and systems in concert with their desired culture. Moreover, that desired culture is one that fits the companys competitive strategy in its market. These companies do not see their culture as static, but rather as a part of the business model that helps them achieve their strategic objectives and financial goals. In the coming years, companies will have no choice but to rethink their company culture and whether it can help them achieve their business vision in the face of global competition and talent scarcity. Opportunities to seize culture as a competitive weapon will become apparent to some and remain a mystery to others. In the meantime, it is important to recognize that culture happens, but not in a black box. Originally published in Deloitte Review #1, 2007 About the authors Stephanie Quappe is a consultant with Deloitte Consulting LLP in New York, specialized in organizational culture transformation and intercultural communication. David Samso Aparici is a senior manager with Deloitte, S.L., currently on assignment in Barcelona, Spain. He specializes in strategic change and organizational transformation. Jon Warshawsky is a senior manager with Deloitte Research, Deloitte Services LP. He is editor of The Deloitte Review.

Endnotes
1. ANN ARBOR, Mich., Jan. 25, 2006/PRNewswire. 2. J. Kotter and James L. Heskett, Corporate Culture and Performance, The Free Press, Simon & Schuster, 2005. 3. Jeff Rosenthal and Mary Ann Masarech, HighPerformance Cultures: How Values Can Drive Business Results, Journal of Organizational Excellence, Spring 2003, Volume22, Issue 2, p. 3. 4. Isaac Dixon, Culture Management and Mergers and Acquisitions, Society for Human Resource Management case study, March 2005. 5. Rosenthal and Masarech, see fn 3. 6. Performance Improvement-What Is a Performance Culture and How Can You Foster One in Your Firm?, Managing Training & Development, Copyright (c)2004 The Institute of Management & Administration (IOMA). 7. Kotter and Heskett, see fn 2. 8. Rob Goffee and Gareth Jones, What Holds the Modern Company Together?, Volume 74, Issue 6, December 1996. 9. Loyalty Quest: Enhancing the Retail Banking Experience to Drive Growth. A joint white paper by Deloitte Consulting LLP and Consumer Bankers Association (CBA), 2005.

85

Talent

86

The Talent Paradox: A 21st century talent and leadership agenda

A world of talent

87

Talent

Headwinds, Tailwinds and the Riddles of Demographics


By Jorrit volkers and Ardie van Berkel > Photography by David Clugston

ne by one, a 4-year-old arranges a cluster of wooden blocks on a table top, hoping to win a token prize. The contest isnt happening in a classroom or a living room, but rather, in a board room at KSB, a 2 billion German manufacturer of pumps and valves and provider of related services. A company recruiter carefully watches his every move. Hes looking for a winner, but more importantly, hes eyeing the future of the company. KSB hosts contests and workshops with 4-year-olds to attract them to industrial careers and measure their aptitude for jobs within the company. KSB will follow the paths of children with potential in an attempt to eventually add them to its workforce.1 Unorthodox recruiting practices at German companies like KSB are the product of an uphill battle against demographics being fought by many organizations. Siemens CEO Peter Lscher has said that the demographic shift will be an extreme challenge for Germanys economy.2 A dearth of qualified engineers and a shrinking population are expected to make economic growth harder to come by.3 Employees at German industrial companies, including Siemens and Porsche, are enjoying bonuses and increased wages to keep them from seeking greener pastures elsewhere.4 Companies like KSB that may not have the brand recognition of Siemens or headquarters in a big city have recognized that attracting

and retaining an ample workforce now and in the future will likely require innovative recruiting techniques. Germany is not the only country facing stiff demographic headwinds. Recent research shows that demographic trends and their influences on workforces vary widely between countries and regions.5 Different regions even countries within regionsare in different stages with regard to current and future labor forces, suggesting that labor strategies should be tailored to local situations. But variance in required strategies between regions and countries also presents important opportunities for companies with a presence in several regions. Recognizing and anticipating demographic differences in disparate parts of the world may help companies replenish otherwise shrinking talent pools.6

Regional picture: growth, shrinkage and life in the city


ccording to the U.S. Census Bureau, the global population is anticipated to grow from 6.9 billion in 2010 to 9.3 billion in 2050. Nearly 5.6 billion people live in what is currently described as the developing world (Africa, all of Asia except Japan, all of the Pacific except Australia and New Zealand, and Latin America), and approximately 1.3 billion live in the developed world (North America,

88

The Talent Paradox: A 21st century talent and leadership agenda

89

Talent

Figure 1. Overview of population and potential labor force1 for global regions

number of people (mio) 00 POPULATION World asia africa and near east europe north america South america oceania POTENTIAL LABOR FORCE World asia africa and near east europe north america South america oceania CAGR2 00-10 POPULATION World asia africa and near east europe north america South america oceania POTENTIAL LABOR FORCE World asia africa and near east europe north america South america oceania
1 2

10 6.853 3.842 1.229 812 344 591 35

20 7.597 4.197 1.511 815 378 657 39

30 8.259 4.469 1.816 807 412 712 43

40 8.820 4.645 2.139 790 446 754 46

50 9.284 4.739 2.473 765 480 779 49

6.089 3.447 976 802 313 520 30

3.845 2.213 540 538 208 326 20

4.503 2.602 705 555 231 387 23

4.999 2.859 896 538 242 439 26

5.385 3.009 1.113 511 252 473 28

5.640 3.029 1.339 482 270 491 29

5.824 2.999 1.562 448 290 494 31

10-20 1.0% 0.9% 2.1% 0.0% 0.9% 1.1% 1.2%

20-30 0.8% 0.6% 1.9% -0.1% 0.9% 0.8% 0.9%

30-40 0.7% 0.4% 1.7% -0.2% 0.8% 0.6% 0.7%

40-50 0.5% 0.2% 1.5% -0.3% 0.7% 0.3% 0.5%

1.2% 1.1% 2.3% 0.1% 0.9% 1.3% 1.4%

1.6% 1.6% 2.7% 0.3% 1.0% 1.7% 1.5%

1.1% 0.9% 2.4% -0.3% 0.5% 1.3% 1.0%

0.7% 0.5% 2.2% -0.5% 0.4% 0.7% 0.8%

0.5% 0.1% 1.9% -0.6% 0.7% 0.4% 0.6%

0.3% -0.1% 1.5% -0.7% 0.7% 0.1% 0.5%

Potential labor force means the population in age group 15-64 years CAGRs > 1% are marked with green; negative CAGRs are marked with redSource: U.S. Census Bureau

90

The Talent Paradox: A 21st century talent and leadership agenda

Europe, Japan, Australia and New Zealand). The population in the developing world is expected to grow at a compound annual growth rate (CAGR) of close to 1 percent through 2050, while the developed world will likely show almost no growth.7 Yet, a closer look reveals demographics that differ across regions (see figure 1). Africa experienced the highest growth in population and potential labor forcethe population that is 1564 years of ageboth in certain terms and as relative numbers in the period 2010 2050. Asias population growth, on the other hand, is expected to slow down, and its potential labor force will begin to shrink in the period 20402050 with 0.1 percent CAGR. If growing populations are the rule in the near future, Europe is the exception. The population in Europe is expected to start declining

in the coming decades, implying a shrinking potential labor force. This trend is not isolated to a single country; virtually all regions in Europe are expected to experience declining potential labor forces with stronger declines occurring in eastern and southern Europe.8 In addition, around the world, people are migrating to cities in unprecedented numbers. In 2010, 7080 percent of the population in North America, Latin America, Europe and Oceania lived in cities, and urbanization is expected to reach 8090 percent by 2050. Similarly, in Africa and Asia, urbanization is experiencing a significant uptick, from 15 percent in 1950 to around 40 percent today. Approximately 60 percent of the population is expected to live in cities by 2050, suggesting that an even larger percentage of the future workforce will be located in cities than is

Figure 2. Potential labor force development of key countries

Index 1995 = 100 200

(Expected) year of declining potential labor force

India

NA

150

United States

NA1

100 1995

United Kingdom France Netherlands China Belgium Germany Japan 2000 2010 2020 2030 2040 2050

NA2 2012 2011 2015 2011 1999 1996

50

1 U.S. potential labor force growth is mainly driven by immigration (Population Reference Bureau, 2007: new immigrants and their children will account for all of the growth in the U.S. labor force between 2010 and 2030) 2 Potential labor force in the UK shows decrease in 2029, followed by a stable period and growth in 2037 Source: U.S. Census Bureau

91

Talent

currently the case.9 Companies with offices outside of cities that struggle to attract a properly skilled workforce could consider establishing offices in big, popular, growing cities where talent may be more willing to live and work. We have already seen strategic responses to this trend. Vodafone Netherlands, for example, opened a second head office in Amsterdam in addition to its office in the far south of the Netherlands. The company relocated most of its commercial and management functions to its Amsterdam office. In addition to being closer to its customers, which are located mostly in the large cities in the west of the country, Vodafone made the decision based on the fact that it wanted to be closer to critical talent. Vodafone discovered that online marketing and sales talent and workers with international ambitions were typically unwilling to move to the south of the country, prompting the company to relocate closer to its desired talent pool.10

Robots and automation


Fertility rates and immigration are the primary drivers of these waning numbers. Countries suffering the sharpest drops in labor force have already sustained low fertility ratesthe number of births per womanfor a long time. A stable population requires 2.1 births per woman in developed countries. Japan fell below this number around 1970, and as of 1990, the birth rate had dropped below 1.5 births per womanwith a further decline to 1.4 in 2000 and 1.3 in 2010. Japan is turning to technology to offset its ongoing demographic challenges. With more than a fifth of its population in the 65+ age group, the country is banking on robots to replenish its workforce and care for its elderly. Robotsalready a staple in Japanese factories, rice paddies and sushi barsare now working as receptionists, janitors and caretakers for the elderly.12 Chinas fertility rate, which hovered above 5.5 live births per woman in 1970, fell below the required 2.1 births for a stable population as of the early 1990s13 due to the implementation of the one-child policy. Immigration levels have not kept pace with this decline, helping to explain the countrys ebbing potential labor force.

Shortfalls and solutions

he potential labor force development of key countries depicted in figure 2 suggests that with the exception of India, the United States and the United Kingdom, the remaining countries shown expect a decline in their potential labor force. Indias ongoing growth is introducing opportunities for companies trying to supplement their workforce. Porsche, for example, started to search in India and other emerging countries because the company could not find enough qualified engineers for a planned plant expansion in East Germany.11 In Germany, the potential labor force started shrinking in 1999 after an ongoing population decline, and Japans potential labor force, which has been declining for 15 years, is anticipated to continue its downward trajectory for the foreseeable future. In several other countries, a decline appears imminent. For example, Chinas potential labor force is expected to dwindle by 2015.

Recruit thy neighbors


Immigration is another key driver of the potential labor force. This is especially true for the United States where the growing potential labor force is driven primarily by immigration as its fertility rate is 2.1 (the number needed for a stable population). Countries such as Japan and Germany, on the other hand, have far lower levels of immigration that cannot compensate for their relatively low fertility rates. German companies are developing strategies to strengthen their workforces by attracting foreign talent. More than 50 German high-tech companies and schools are planning to launch a project in Poland next year. The aim is to recruit dropouts from Polish schools and train them to work in Germany.

92

The Talent Paradox: A 21st century talent and leadership agenda

Given a lack of qualified German applicants for their skilled positions, German companies are increasingly looking east to countries like Poland to supplement their waning workforce numbers.14 While Germany and the Netherlands declines look quite similar (see figure 3), the German decline appears to be much steeper. Germanys forecasted shortage of employees in 2050 is estimated at 8.2 million or 19 percent of their current labor force, compared to only 275,000 or 3 percent in the Netherlands.15 The main reason for this differing decline is Germanys lower fertility rate of 1.4 compared to 1.7 births per woman in the Netherlands. To envisage the magnitude of the implications, the forecasted German labor shortage in 2050 will be higher than the total current workforce in the Netherlands. As the Netherlands and Germany are neighboring countries, a severe employee shortage in Germany might have implications for the Netherlands. A young, talented Dutch engineer could easily live in the middle of the Netherlands and travel east several days
Figure 3. Comparing ve countries more in depth

a week. Given the shortage of engineers in Germanya skill shortage that, in all probability, will grow as a result of the declining labor forcethe proximity and similar languages of the two countries could spur German companies to start recruiting aggressively in the Dutch market. Higher wages and excellent career opportunities can be very attractive for the talent involved, but it would leave companies in the Netherlands struggling to find employees with technical skills and incite them to take appropriate measures to counter the potential talent drain. The ripple effects of demographics, therefore, are far more intricate than the macro-level trends alone would suggest.

Respect thy elders (and keep them on the payroll)


When it comes to demographics, death is as significant as birth rates. Life expectancy is growing and is projected to continue growing in the coming decades. This increases population but not the potential labor force, which is

Netherlands

Germany United States Fertility rate (est. 2011)1 (Expected) year of declining potential labor force2 20102 65+ age group as % of 15-64 years old (Expected) 20502
1

China India

2.1

1.7

1.4

2.6

1.5

NA 19% 33%

2011 22% 44%

1999 31% 53%

NA 8% 22%

2015 12% 45%

The replacement fertility rate for a stable population is approximately 2.1 births per woman. For developing countries it ranges 2.53.3 because of higher mortality rates. Source: CIA World Factbook 2 Source: U.S. Census Bureau, 2010 measurement Source: CIA World Factbook, Eurostat, United Nations, 2010

93

Talent

currently defined as people in the 1564 age range. In the developed world, the number of people in the 65+ age group as a percentage of 1564-year-olds is expected to grow significantly between now and 2050.16 Countries with an aging population and a shrinking potential labor force will most likely show only small GDP growth through 2050. A declining labor force implies that a country can only boost its GDP by improving labor productivity per person. Consequently, the heavy burden of healthcare and retirement costs will be placed on fewer shoulders and lead to lower net income for the working population, suggesting reduced spending power among consumers in the 1564 age range to drive consumption and the economy. However, a grayer population can have a silver lining. The 65+ age group could become a large addition to the labor force if countries and companies can provide appropriate incentives and, in some cases, redesign how work gets done. Flexible work arrangements, greater support, and recognition from managers can help companies retain older employees.17 Making it financially attractive for 65+ employees to continue working may require new government policies in many countries that allow people to work beyond the current retirement age and incentivize this with, for example, adjusted tax rules. The average age of BMWs plant workers is on the rise and expected to hit 47 years of age by 2017.18 As a result, the company piloted a production line in Germany consisting of employees with an average age of 47 years. The carmaker improved the ergonomics of assembly lines based on requests from workers and introduced workstation changes every four hours, fitness exercises during work time, and even a relaxation room for short naps. BMW made 70 relatively small alterations that reduced errors on its assembly line and physical strain on its workforce. Absenteeism declined, and the defect rate on the assembly line dropped to virtually zero. BMW expanded the pilot to several other plants and

plans to introduce it to more plants in the coming years.19

Influence choices at a young age


A dearth of young people also implies a smaller pool from which companies can select employees, magnifying the importance of matching educational backgrounds with workforce needs. German companies, for example, have begun to focus on aligning education with the needs of its industries. In Germany, I consider it a duty for companies in particular to promote interest in technical occupations through active interaction with children and youth, said Wolfgang

Malchow, former board member for human resources at Bosch. This is the only way we can win over qualified junior staff for tomorrow and beyond.20 The Bosch Solar Energy business division and Staatliches Gymnasium, a public high school in Arnstadt, Germany have realized the need to promote interest in technical occupations at an early age. They recently signed an agreement to offer early career orientation for students within the context of the KnowledgeFactory (Wissensfabrik in German), a cooperation between companies and schools in Germany. This associationfounded by German giants including

94

The Talent Paradox: A 21st century talent and leadership agenda

BASF, Bosch and Thyssen-Krupptries to kindle enthusiasm for technology and business among school-aged children.21

Emerging countries and the long arm of recruiting


The prospect of a declining labor force and an aging population looms over Chinas longer-term circumstances, but the countrys current problem is precisely the opposite. The college-educated Chinese workforce is expanding faster than its economy, adding more than 6 million graduates each year. Chinas economy is growing, but it is not producing enough professional jobs, so nearly a quarter of its graduates fail to find work.22 This may turn around in the current decade, but the abundance of college graduates from China and other emerging countries provides opportunities for companies seeking college-educated workers. The Japanese arm of the Boston Consulting Group (BCG) is responding to Chinas surplus of aspiring talent by recruiting many of Chinas best and brightest graduates to supplement the workforce in its Japanese office. Although Japanese companies have long been recruiting in China for their Chinese affiliates, recruiting for positions in Japan is a new development. For Chinese students, this means a chance at much higher pay and professional development. This strategy is spurred by more than a declining labor force in Japan: Chinese personnel are a critical part of the marketing strategies at Japanese companies trying to foster a foothold in China. (Sales pitches by Japanese staff in China have their limits, according to an official with a major food company.)23 The goal is to cultivate Chinese talent that can eventually develop new markets in China for this Japanese company. 24

youngest population of the representative countries, Indias demographic picture bodes well for talent-strapped companies trying to expand their workforce. For example, Infosys started the Campus Connect initiative to help increase Indias competitiveness. Infosys and engineering institutions collaborate to deepen the pool of IT talent. The initiative targets college campuses that feed the IT industry and fuel its growth. It includes, for instance, training sessions at colleges, aligning curriculums with industry requirements and publishing Infosys courseware on the Web.25 (However, in the Nothing good lasts forever department, Indias fertility rate has been declining since 1970 when the fertility rate was 5.5. This, coupled with a longer life expectancy, will add to Indias percentage of people aged 65+ relative to people aged 1564. This percentage is expected to almost triple in the next 40 years.) Dutch companies are also exploring innovative ways to develop an ample skilled workforce. IHC Merwede, one of the largest ship building companies in the Netherlands, recently invested heavily in a new technical education organization to anticipate future shortages of specialized, technical employees. IHC Merwede brings in employees as teachers, and metal study objects are, if made successfully by the students, actually used in the end product (ships). By bringing theory to practice, IHC Merwede hopes to attract motivated students to the metal sector.26

Recruiting and retaining women


Many companies are devising creative solutions that take demographic realities into account, including deliberate steps to make better use of countries entire potential labor forces by creating more professional opportunities for women. In South Korea, for example, only 60 percent of female graduates in the 2564 age group are employed, making college-educated South Korean women the most underemployed in OECD countries, according to The Economist.27 South Korean women often

Big business on campus


Collaborating with universities and vocational training schools has yielded additional paths around the demographic walls. India provides some telling examples. With an expected fertility rate of 2.6 in 2011 and the

95

Talent

encounter social pressures to trade professional life for parenthood, making it difficult to maintain an upward career trajectory. Many companies, as a result, fill their senior-level positions exclusively with men, leaving large numbers of talented females professionally eclipsed. Goldman Sachs uses this otherwise unfortunate trend as an opportunity to recruit underutilized female talent, and it now has more women than men in its office in Seoul.28 So too at Siemens, which expands its talent pool by recruiting women, including mothers. It established 400 day care centers for employees children and plans to double that figure. Furthermore, the company created a science camp for talented high school-aged female mathematics and physics students and started a mentoring program for female undergraduates.29

work spaces. At the headquarters of a large Dutch company, for example, designers created a space without assigned work stations, and the company allows employees to work anywhere, anytime.32

Looking Ahead

he numbers can be discouraging, but companies operating in countries with declining populations are not powerless in the face of demographic headwinds. In some cases, they have turned these challenges into competitive opportunities. Understanding the potential challenges and opportunities a company might encounter in the coming decades begins with three fundamental considerations: The demographic realities that define the major countries where a company operates. The potential talent-related problems and opportunities a company may encounter when operating in a specific country. The bigger picturepossible solutions and opportunities across countries and regions. Demographics may be destiny, but they dont have to be doomsday. An ounce of demographic foresight can yield insights as to where a companys customers and its workforce will likely live. Knowing the future whereabouts of its workforce and its customer base can help a company decide where to establish factories, offices and headquarters. Multinational companies can use shifting populations to their advantage by allowing abundance in one location to offset scarcity in another.

Flexible careers and flexible hours


Companies may not be able to alter the demographics of the countries in which they operate, but adapting their talent strategies to the needs of their workforces can go a long way in offsetting demographic pressures. Cisco is pursuing a new model for career development that accommodates lateral as well as vertical moves to cultivate its next generation of leaders. The corporate lattice model is a more flexible approach to performing work, building careers and developing talent.30 More flexible career paths can help retain employees with young children and older employees who want to continue working but at a slower pace. In the Netherlands, 75 percent of women work part time. Job sharing is the norm, especially in female-dominated sectors like healthcare and education. Part-time work has become a powerful tool to attract and retain talentmale and femalein a competitive Dutch labor market. Part-time work isnt the sole province of the female workforce; 23 percent of Dutch men work reduced hours, and 9 percent work a full week in four days.31 Dutch companies are accommodating this trend by allowing for flexible hours as well as

Originally published in Deloitte Review #10, 2012 About the authors Jorrit Volkers is a partner in the tax practice of Deloitte Netherlands. Ardie van Berkel is a partner and Human Capital practice leader of Deloitte Netherlands.

96

The Talent Paradox: A 21st century talent and leadership agenda

Endnotes
1. Vergrijzingsproblematiek, Personeel uit Kindergarten, Financieel Dagblad, March 19, 2011. 2. Germany pays price of labour shortages, Financial Times, November 24, 2010. <http:// www.ft.com/cms/s/0/f8a5005c-f7ea-11df-8d9100144feab49a.html#axzz1a7l1ft7V> 3. Ibid. 4. Ibid. 5. Professional Services 2020 studyDemographics Point of View, Deloitte Netherlands, March, 2011. 6. One note of caution; in order to gain insights into long-term trends like demographics, several simplifications and assumptions have to be made. Key uncertainties include the balance of emigration/immigration and life expectancy, given medical developments. 7. International data baseMidyear Population, by Age and Sex for Region Summary. US Census Bureau, December 2010. 8. Ibid. 9. World Urbanization Prospects: The 2009 RevisionFile 2: Percentage of Population Residing in Urban Areas by Major Area, Region and Country, 19502050, United Nations, Department of Economic and Social Affairs, Population Division, January 2011. 10. Deel banen Vodafone van Maastricht naar Amsterdam, Volkskrant, October 10, 2007; Vodafones verhuisperikelen, Intermediair, April 2, 2008. 11. Personeel gezocht, Financieel Dagblad, August 29, 2011. 12. Japanese robots enter daily life, USA Today, March 1, 2008. 13. Economic, Environmental and Social StatisticsTotal fertility rates, by Age and Sex for Region Summary, OECD Factbook 2010. 14. Germany pays the price of labour shortages, Financial Times, November 24, 2010; Germany looks East to boost shrinking trainee numbers, Deutsche Welle (DW-World.de), July 14, 2008. 15. Mind the Gap, Sociaal Economisch Onderzoek (SEO), February, 2007. 16. International data baseMidyear Population, by Age and Sex for Region Summary, US Census Bureau, December 2010. 17. Talent edge 2020: Building the recovery togetherWhat talent expects and how leaders are responding, Deloitte Consulting LLP, April, 2011. 18. How BMW is defusing the demographic time bomb, Harvard Business Review, March, 2010; 19. How BMW deals with an aging workforce, CBS News, <http://www.cbsnews.com/ stories/2010/09/05/sunday/main6837469. shtml, September 5, 2010>. 20. Bosch Solar Energy and the Arnstadt public high school sign cooperation, Press release Bosch, January, 2011. 21. Ook in Duitsland een tekort aan technici, <http://techniektalent.nu.> 22. Millions of Chinese graduates face unprecedented challenge in finding work, The Guardian, December 4, 2008; Chinas army of graduates struggles for jobs, The New York Times, December 11, 2010. 23. Japanese firms hire Chinas brightest, <http://blog.dacare-group.com/index. php/2010/11/30/japanese_firms_hire_china_s_ brightest , November 30, 2010>. 24. Ibid 25. <http://campusconnect.infosys.com/faq.aspx.> 26. IHC Merwede investeert miljoenen in nieuwe opleidingscentra, Financieel Dagblad, May 19, 2011; IHC Merwede investeert miljoenen in nieuwe opleidingscentra, Maritiem Nieuws, May 5, 2011. 27. Profiting from sexism: If South Korean firms wont make use of female talent, foreigners will, The Economist, October 2010. 28. Ibid. 29. In Germany a tradition falls and women rise, The New York Times, January, 2010. 30. The Corporate Lattice, Talent Management, January 29, 2011; The Corporate Lattice: A Strategic Response to the Changing World of Work, Deloitte Review, Issue 8, 2011. 31. Working (part-time) in the 21st century, The New York Times, December 29, 2010. 32. Ibid.

97

Talent

Talking About Whose Generation?


Why Western generational models cant account for a global workforce
By David Hole, le zhong and Jeff Schwartz > Photography by David Clugston

98

The Talent Paradox: A 21st century talent and leadership agenda

t is 8 pm in Shanghai, and Kan, a marketing manager for a large global retailer has just gotten off of another call with a headhunter. I like this company. Im rewarded as a top performer and being considered for a promotion, he thought. But my creativity and drive for taking the business to the next level are simply not appreciated here. My bosses are nice but old-fashioned, too conservative to promote my best ideas or work with Global to implement them. I know they see this as a safe approach, but my former colleagues who took my ideas to other firms have been hugely successful. He stepped back into his office and looked at the pile of files on his desk. Should I stay and be comfortable or look somewhere else for a more fulfilling future? Im only 29 lots of opportunities. I know others on my team feel the same way. Maybe some of them would love the idea of going to a new company with me. Meanwhile, the Beijing-based head of R&D for a global pharmaceutical company is contemplating her talent challenge. We are so strong in developing new talent; our programs are second to none, and that is my problem. People come to us, scientists and medical professionals straight out of university, because we have a reputation for professional development. They stay with us for two years, and then they are off. I am the finishing school for our competitors. She explains that while the U.S. parent company has the development process nailed, they are failing to deliver retention strategies that have resonance to young professionals in China.1 Each generation that enters the workforce introduces a unique set of motivations and strengths to the workplace. A successful talent strategy can hinge on an organizations understanding of what makes its employees tick in the same way that broader business strategy relies on an understanding of differences between its myriad customer groups. Differences between generations can affect the way organizations recruit and build teams, deal with change, motivate and manage people, and boost productivity and service effectiveness. But despite their best efforts to shed false

assumptions about a homogeneous workforce, global companies often oversimplify their talent strategies. They ground decisions in an incomplete picture of their global workforces by assuming the same generations exist across the countries where they operate. The characteristics of generational cohorts in the Western countries where talent strategies originate do not necessarily address the core aspirations and drivers of behaviors in other parts of the world. Gaining a more complete picture of a talent pool requires companies to understand the generational composition of their entire global workforce. Throughout the West, organizations tend to divide their workforces into three generational groupings: Baby Boomers (born between 1943 and 1964), Generation X (born between 1965 and 1980) and Generation Y (born between 1981 and 2001). Each group tends to have predominant, common traits. For example, Boomers are commonly defined as demonstrating a strong work ethic and expecting hard work to be rewarded; Generation X as tending to favor work-life balance and flexibility; and Generation Y as embracing social technology and diversity. Organizations can bolster their talent management approaches by determining recruitment, retention and development strategies that cater to the various needs of each generation. But perhaps these divisions arent as straightforward as they appear. After all, why should the same generational lines and cultural norms apply to workforces that exist in otherwise disparate countries, histories and cultures? In and of themselves, the definitions that drive talent strategies are too broad. Consider, for example, the application of these generational divisions in the United Kingdom. At the tail end of the Boomer generation are the so-called Thatchers Children who entered higher education or the workforce at the outset of the market liberalization. Are they really likely to share the same attitudes as those who were born, raised and employed under societal conditions informed by the post-War socialist consensus? Likewise in France, the student
99

Talent

riots and the general strike of 1968 profoundly influenced the world views and aspirations of those of college age (the soixante-huitards). These two examples raise an important question about the generally accepted Western business view of generational differences: even assuming that the designations of Boomers, Gen X and Gen Y are useful across North America and Europe, the socioeconomic and political events that drove societal transformationand hence, influenced attitudeswere significantly different. If the Western definition of generations is so broadly stated, then how useful are these definitions in driving business related people strategies on a global basis? Companies that merely transplant U.S.-centric notions of Boomers, Gen X and Gen Y tend to average out similarities between generations across geographies and thereby lose sight of

significant differences in a business setting. Claiming that millennials are millennials wherever they are in the world is tantamount to blithely saying that customers are customers the world over. Global businesses need to shed the tendency to average out generational differences in favor of a more complex and complete picture of their workforces. Does the fact that professionals in New York, London and Beijing display similar outward material characteristics reflect a convergence in the aspirations, ambitions, values and attitudes that drive talent strategies? Put simply, does the fact that workers from New York, London and Beijing walk the city streets listening to their music of choice, wearing designer jeans and drinking lattes indicate anything deeper than the outward appearance of convergent characteristics between contemporary generations across

Figure 1. Global generation overview

1950

1960
Post-50s generation (1950-1959) Post-60s generation (1960-1969)

1970
Post-70s generation (1970-1979)

1980
Post-80s generation (1980-1989)

1990

2000
Post-90s generation (1990-1999)

China India South Korea Japan


1st Baby Boomer (19461950)

Traditional generation (1948-1968) 475generation (1950-1959) 386generation (1960-1969)

Non-Traditional generation (1969-1980)

Gen Y (1981-onward) Gen X and Gen Y (1970-onward)

Danso generation (1951-1960)

Shinjinrui generation (1961-1970)

2nd Baby Boomer (19711975) Gen X (1965-1983)

Post Bubble (1976-1987)

Shinjinrui Junior (19861995)

Yutori (1987-2002)

Russia Bulgaria Czech Republic South Africa Brazil


U.S.

Baby Boomers (1943-1964) Post War generation (1945-1965) Baby Boomers (1946-1964) Baby Boomers (1943-1970) Baby Boomers (1946-1964) Baby Boomers (1943-1964)

Gen Y (Gen Pu) (1983-2000) Democracy generation (1980-onward) Generation Y (1983-2000) Gen Y (1990-2000+) Gen Y (1981-2001) Gen Y (1981-2001)

Communist generation (1965-1980) Generation X-Husaks Children generation (1965-1982) Gen X (1970-1989) Gen X (1965-1980) Gen X (1965-1980)

100

The Talent Paradox: A 21st century talent and leadership agenda

the globe? Can we assume similarities in the ways they make career decisions or perform their jobs? Much of the literature on these issues oversimplifies and overstates the extent and depth of generational convergence. While the concept of generational differences is universal, how those generations are defined remains specific to a given society. As a consequence, a workforces ambitions, aspirations and behaviors manifest themselves in the labor market and the workplace. This should be of interest to all business leaders who seek to enter a market, build global business operations or maximize the productivity of a workforce across national borders.

1945 and All That

etS start with an observation that is at once obvious and overlooked by most Western framers of the concept of the three generations (Boomer, X and Y). Year Zero for baselining the modern era is not universally held to be 1945. That may be true in North America, across Europe, in Japan and the original British Commonwealth, but it is certainly not true elsewhere. This is important because generational differences in any society are shaped by the political, socioeconomic and cultural events that have a transformative impact on the body politic. If the defining seismic event that heralds the modern era varies from country to country, then by extension, the definition of generations starts from the principle of variable geometry. Figure 1 illustrates how this variability plays out across selected geographies.

Asias Many Faces

he four powerhouse economies of Asia China, India, Japan and South Koreacan be used to illustrate the way generational differences play out in the workforce. For business leaders to make sense of the generational differences in each country, it is essential to start with a brief overview of the defining

political and socioeconomic events that shaped generational attitudes. The defining date of the modern era for China was the foundation of the Peoples Republic in 1949. This was followed by almost 30 years of economic and political turmoil that had a significant impact on the attitudes, aspirations and fears of the population. From the economic catastrophe of the Great Leap Forward in 1960 through the Cultural Revolution that lasted until 1976, values in China were based purely on communism and Maoism. This changed gradually and significantly with the economic reforms launched by Deng Xiaoping in 1978. Since then, China has experienced nearly continuous growth and relative market liberalization. Beneath these headlines, however, are other significant social and political developments. Chinas adoption of the One-Child Policy in 1980 radically impacted the traditional family structure in many unforeseen ways and resulted in a generation that grew up in a family environment of high expectations and minimal competition for attention. In 1998, another round of economic reform was introduced by Premier Zhu RongJi, which led to a restructuring of State Owned Enterprises (SOEs) that trimmed the workforce by 20 percent nationally and phased out state-provided free housing and healthcare to all workers. Around the same time, college graduates acquired the right to choose their own jobs, and multinational corporations (MNCs) started recruiting on Chinese campuses. This history of accelerated and, at times, cataclysmic change profoundly influences the definition and characteristics of generations in the workplace. Due to the accelerated cultural and economic transformation, each decade introduced a generational cohort with distinct characteristics. As a result, the U.S.-centric model of Boomer, Gen X and Gen Y is meaningless in a Chinese context. Instead, four distinct generational groupings currently co-exist in the workplace: post-50, post-60, post-70 and post-80 generations. The characteristics
101

Talent

of each generation and the manifestation of the differences between them in the workplace is a hot topic that sparks discussions across Chinese magazines, newspapers, websites and MBA seminars. Consider, for example, just two of the four groupings: the post-70 and post-80 generations. The post-70 generation (born between 1970 and 1979) is more Western in outlook than preceding generations, reflecting the fact that it includes the first college graduates who chose their own careers and benefited from on-campus recruiting from multinational companies. It also was the first generation that stopped receiving free housing from employers. Meanwhile it is also the last generation raised in a collective family and educational environment; members of this cohort are typically willing to sacrifice self-interest for the greater good of the collective group. In comparison, the post-80 generation (born between 1980 and 1989) is the first generation of single children to emerge after the introduction of the One Child Policy in

AFRICA EmERGInG
The leading economy in Africa is that of South Africa, a country that has gone through tumultuous change, from the establishment of apartheid by the nationalist government in 1948, the Sharpeville Massacre, and the 1976 Soweto Uprising to the constitutional changes of the early 1990s and the first democratic election under universal suffrage. This emergence from the apartheid era had an impact on the composition of the workforce and the attitudes of those participating. One of the byproducts of apartheid was an employment environment in the public sector that gave preference to white South Africans in certain areas. As South Africa entered the democratic era, affirmative action was introduced to hold companies to strict employment quotas aimed at making the workforce more reflective of the population as a whole. As a result, the South African Gen X tends to be more entrepreneurial, displaying skepticism of corporations and hierarchy while looking for an outputs-driven workplace. Gen Y, meanwhile, has no memory of apartheid and seeks a relaxed, informal workplace that differs from the command structure that shaped the boomers.

1980. As a group, they have a reputation of being individualistic and confident but also self-centered and rebellious. Compared to preceding generations, they are regarded as innovative, open-minded toward new ideas and approaches. The collectivist post-70 generation in Chinas workplace is often faced with the challenge of managing the individualistic post-80 generation. In this context, post-70 managers have found that, unlike themselves, their post-80 subordinates typically have little respect for authority, actively seek to manage their own careers instead of having faith in the organizations system, and are far more likely to leave their job if the environment does not satisfy them. Furthermore, a recent survey shows that the 80s generation considers the 70s generation to be overly conservative, lacking in creativity and reserved to the point of appearing fake.2 These generational differences introduce new challenges pertaining to talent management, and companies are facing unprecedented attrition rates among their post-80 talent. While Western talent management best practices will be helpful in addressing many of these issues, it is essential to understand a countrys unique local dynamics. As the head of commercial development for a leading MNC noted, We need to get smarter in recognizing that one size fits all doesnt work for my talent needs. To recruit, retain and get the best out of sales and marketing professionals I need Corporate to acknowledge that think global, act local should translate into plan local and connect global. Not only do my young professionals not think like the Americans at Corporate they dont think like me!3 Reflecting the sentiment behind that observation, global companies such as Motorola, P&G, Unilever and IBM are already considering ways to address the needs of the new generation of workers in China.4 Generational differences in China are unique among its Asian neighbors in addition to their stark contrast to the BoomerX-Y model that permeates the United States. Japans post-war history includes the upheaval

102

The Talent Paradox: A 21st century talent and leadership agenda

of student activism throughout the 1960s, the economic impact of oil crises in 1973 and 1978, and the bubble economy of 19861991. This was followed by an Employment Ice Age that lasted from 1993 until 1999. Changes to the education system in the 1980s have also created divergence between generations. As Figure 1 illustrates, shifting social sands in Japan since the end of World War II resulted in seven discrete generational cohorts that cannot be aligned with the Boomers, Gen X and Gen Y, their contemporaries in the West. The Shinjinrui Generation (19611970)also known as the Bubble Generation spent its adolescence in the bubble economy of the 1980s.5 The first generation to show clear signs of individualism, members of this cohort benefited from a shortage of skilled labor and tended to move quickly up the corporate ladder, often lacking the requisite leadership skills for the positions they held. Their children, the aptly named Shinjinrui Junior Generation, meanwhile were born toward the end of the bubble economy (1986-1995).6 Also known as Generation Z, their attitudes toward employment were shaped by their parents struggle with recession. As a result, they typically demonstrate a clear bias toward stable corporate jobs and have benefited from opportunities created by economic recovery and the retirement of the first Baby Boomers. The most recent entrants to the workforcethe Yutoriwill be of particular interest

...shifting social sands in Japan since the end of World War II resulted in seven discrete generational cohorts that cannot be aligned with the Boomers, Gen X and Gen Y, their contemporaries in the West.

to employers in Japan as they adapt to the workplace. The product of a more liberal education due to Yutori education reforms, they are perceived to lack the focus and discipline of earlier generations.7 Within the workplace, they typically demonstrate greater individualism that can be a source of friction with older generations brought up to accept group thinking. While technically competent, many believe that the Yutori need more coaching and guidance. Meanwhile the years that followed the Korean War were filled with tumultuous change, including a military coup in 1961 that heralded nearly three decades of autocratic rule in South Korea. At the same time, a focus on exports and the role of the Chaebol conglomerates resulted in rapid economic growth until the 1980s. The transition to representative democracy in 1998, coupled with the fallout from the IMF crisis nine years later, has further altered the attitudes of the younger generation. For South Korea, the 475 Generation so titled in the 1990s to denote those who were in their 40s, went to University in the 1970s and were born in the 1950s, thus 4-7-5was the backbone of the corporate workforce during a period of rapid economic growth. Shaped by the deprivations that followed the Korean War, this generations workers value hierarchy, tenure and responsibility and now constitute the leadership of many corporations. Their successors, comprising the 386 Generationin their 30s,
103

Talent

attended University in the 1980s and born in the 1960swere the first to come of age during this period of rapid growth and prosperity. That comfort, in turn, led to challenges of more traditional values as part of a general reaction to the autocratic regime that culminated in 1998. Interestingly, their successors grew up in a booming economy, with the exception of the IMF crisis. They are characterized as being somewhat spoiled but tend to have more center-right leaning views than the 386 Generation. They are, however, usually more selective about their careers and far more likely than the 475 to switch employers. As a result, companies in South Korea have to adopt creative new talent strategies. From an economic perspective, outward similarities between India and China abound. Over the last two decades, both countries experienced significant growth and benefited from globalization. In reality, these two countries house profound differences, so looking for similar traits within generational groups is an exercise best approached with a degree of caution. The defining moment for India in the second half of the Twentieth Century was Independence from British rule in 1947. While the Chinese post-war experience was one of authoritarian rule under the CCP, India maintained the institutions of democracy and a legal system that protected individual rights. Due to the comparative stability of steady economic progress, those who entered the workforce in the first 30 years of independence gravitated to companies associated with manufacturing,

public investment and infrastructure development. This generation of Traditionals typically aspires to lifetime employment and offers a high degree of loyalty to their employers in return. Favoring a cash-low, benefits-heavy rewards model, the Traditionals favor promotion based on tenure. Members of the succeeding NonTraditional generation experienced the impact of market liberalization very early in their careers and benefited from the initial boom in outsourcing. As a consequence, they are often more entrepreneurial than the Traditionals and favor career progression based on merit rather than tenure. The economic boom presented an explosion in opportunities that has resulted in rapid career advancement, a decrease in loyalty to employers and increased demand for wage inflation. As one senior executive of a technology company explained: Even with the recent shocks to the economy, it is pointless to have corporate HR in the United States talk about retention strategies unless they can understand that I have to redefine my retention strategy every quarter. Things change that fast, and all these younger folks share full details of compensation. Nothing is secret.8 These trends of employee aspiration continued with the Indian Gen Ys who have fully embraced a career model of rotation between employers as they pursue career advancement. Furthermore, they typically value talent programs that speak to their development needs and opportunities for advancement and enrichment (for example, through opportunities to work globally).

THE SOuTH AmERICAn GIAnT


Despite a very different history, the generational grouping in Brazil closely mirrors those in the United States. Gen Xers display greater entrepreneurial mindedness than the preceding Boomer generation. They tend to look for a basket of rewards that provide incentives, including personal time and development opportunities. Meanwhile, Gen Yers are even more development-oriented, placing a premium on work that provides greater personal freedom. They seek mobility and display a preference for international work.

104

The Talent Paradox: A 21st century talent and leadership agenda

New Europe and Generation Pu

he limits of the Western model of Boomer, Gen X and Gen Y are also evident in the former Soviet Union and satellite nations of Central and Eastern Europe. Sitting next door to Western European societies where the concept of three broadly defined generational groupings is widely accepted, countries that emerged from communist rule in 1989 have been through a sociopolitical and economic transformation that is unparalleled among their Western neighbors. In turn, this transformation had a profound impact on the attitudes and aspirations of the workforce. In Russia, the Boomers entered the workplace while the state controlled the economy. They tend to exhibit strong professional knowledge but often lack the business skills needed to succeed in a liberalized marketplace. Having lived with the reality of Soviet communism where standing out was unwelcome, this

comparatively collectivist generation is less inclined to initiate and share ideas.9 On the other hand, Russias Gen X entered the workforce at a time when society was in an apparent freefall as the oligarchs carved up the spoils of the former Soviet Union, people over extended themselves with loans and the country descended into hyperinflation. Into this frenzy came a new generation that was more interested in generating wealth than in developing a career. Rejecting the constraints of organizational loyalty, Gen Xers gravitated to roles where they could be their own boss, becoming self-taught on modernbut not necessarily the bestbusiness techniques. Beginning in 1983, this group was followed by the first truly postSoviet generation to enter the workforce under the presidency of Vladimir Putin, the so-called Generation Pu. This group is far more focused on professional development than Gen X. Members of this generation typically demonstrate a

105

Talent

willingness to sacrifice work-life balance early in their careers in exchange for quick advancement. Having less interest in self employment than Gen X, they tend to find opportunities presented by multinational corporations alluring. Interestingly, Generation Pu is uniquely nationalistic compared to its generational contemporaries in other countries. How this plays out is yet to be seen. Similar trends emerged elsewhere in Central and Eastern Europe after the collapse of communism and the Soviet empire; but even here, generational nuances are as numerous as the histories that shaped these various countries. For example, the Boomers in the Czech Republic and Bulgaria are, like Russias, the product of post-war communism and embrace more collectivist working styles. However, the impact of the Prague Spring of 1968 and the Velvet Revolution of 1989 directly shaped the attitudes of the Czech Republics Gen X (also known as Husaks Children). This generation is profoundly focused on compensation and career development opportunities. Meanwhile, Gen Y in the Czech Republic and their Bulgarian contemporaries, the Democracy Generation, are more inclined to seek work-life balance than their immediate predecessors. For Bulgarias Democracy Generation, openness to the opportunities created by globalization is a clear trait, and opportunities to work abroad are regarded as a standard part of career experience.

This becomes especially important in the context of the existing gulf between employers and employees on talent priorities. There is a tale of two mindsets when it comes to understanding which employee groups are leaving and why they seek to leave. Furthermore, our research indicates that corporate leaders often fail to understand the non-financial priorities of their employees, such as the need for strong leadership, effective communication and career advancement opportunities, while the degree of importance younger employees place on these non-financial priorities varies across geographies. As a consequence, although there is a growing recognition that in order for companies to build effective retention strategies they will need to tailor their tactics to account for generational differences, there remains the problem that many corporate leaders may be misreading the priorities among different generations, leading employers to offer the wrong incentives to the wrong employees.10 Effectively addressing these challenges begins with a more complete understanding of the local workforce, its various segments and what makes each group tick. Rather than standardizing talent management, companies should devise country-specific talent strategies with the involvement of local leaders who are as versed on the different aspirations of the generations that make up a workforce as they are on other aspects of their business. Such an understanding could help companies: Better address key issues for global expansion and enhance ROI on talent programs through the design of customized programs that speak directly to employees aspirations, ambitions and attitudes (based on the generational cohorts that comprise a given country). Enhance leadership capabilities for managing and collaborating across borders and generations, and thereby enhancing management effectiveness and business performance.

Bringing it All Back Home

ompanieS seeking to enhance their global success need to figure out how to maximize business performance in the geographies they choose to operate in. As they expand globally, they will encounter several salient challenges: Attracting talent (especially leadership) to successfully navigate the market. Maximizing the performance of local talent. Retaining employees in markets with high turnover rates.

106

The Talent Paradox: A 21st century talent and leadership agenda

Create competitive advantages by helping them stay current on expected workforce composition, employee benefits options and preferences, and other competitive offerings to determine the best plans to attract, retain and motivate top talent. For those companies that embrace the concept of plan locally, connect globally, understanding and connecting with the aspirations of the demographic groups they are targeting can help them in their efforts to reduce cost and optimize performance on a global basis. The recognition that customers are a heterogeneous bunch emerged as one of the important ideas for marketers in the last century. With increasing importance of talent as a competitive factor, the recognition that generations differ around the world may be one of the important strategic avenues for decades to come. Originally published in Deloitte Review #5, 2009 About the authors David Hole is a senior manager with Deloitte Consulting LLP and leads the Globalizing Work service offering. Le Zhong is a manager with Deloitte Consulting LLP and the deputy lead for Globalizing Work. Jeff Schwartz is a principal with Deloitte Consulting LLP and leads the Global Talent market offering.

Endnotes
1. From conversations with the authors: Beijing, March 2009 2. Translated from: Sohu (2007). Report on life of the post-80s generation in the workplace. Retrieved from http://news. sohu.com/20070820/n251683497.shtml 3. From conversations with the authors: Shanghai, March 2009 4. Translated from: Yidaba (2007). Power struggles between the post-70 and post-80 generations. Retrieved from http://management.yidaba.com/rlzy/232295.shtml 5. Translated from: President Online Understanding Employees from Bubble Era (2000, December 19) 6. Translated from: President Online Truth about Generation Z (2008) 7. Translated from: Weekly Diamond Online Three Key Characteristics of the Yutori Generation (2008) and Nikkei BP Online Associate Yutori Generation is Coming to the Workplace (2008, April 1) 8. From conversations with the authors: Hyderabad, November 2007 9. Groznaya, Elena. Conflict of generations: Business culture of contemporary Russia. June 2009. TCWorld Magazine. Retrieved from http://www.tcworld.info/index.php?id=36. 10. Deloitte Consulting LLP survey: Managing Talent in a Turbulent Economy: Keeping your team intact, A Special Report on Talent Retention, September 2009

107

Talent

Smarter Moves
Improving the value of global mobility by aligning strategy, investments and operations
By Jeff Schwartz and Gardiner Hempel > Photography by matt lennert

or many organizations, growth and even survival hinges on penetrating and scaling operations in rapidly growing and emerging markets unlocked by globalization. Thats a tough challenge, especially when the critical market and production opportunities and critical talent are often not in the same country. Yet a surprising number of companies continue to handle international assignments in ways remarkably similar to how they operated decades ago. The traditional, and still the most widespread, approach to international assignments typically handles each case as a special event with expectations for comprehensive, hightouch service. This one-size-fits-all approach, however, increasingly overshoots the mark for many situations, unnecessarily raising costs. Additionally, it often fails to meet the specific needs of both the business and the assignee, leaving key business goals unfulfilled and key talent development priorities unaddressed. More broadly, many executives are uncertain that they are receiving an appropriate return on their global mobility investment, or even that they can measure that return in a meaningful way. And global mobility is a significant investment one that, in our experience, can easily top $1 million per assignment. Its an investment that can drive tremendous

value, but only if leaders can effectively harness a companys global mobility efforts to pursue strategic priorities. So what can leaders do to better manageand improvethe return on their global mobility investment? In our experience, companies that gain the most value from global mobility show a high degree of alignment between global mobility and the larger business in three areas: 1. Business and talent strategies 2. Expected assignment value 3. Mainstream HR and talent operations Achieving greater alignment in these areas can go a long way toward helping companies drive business value through global mobility at manageable cost levels.

Strategic alignment
ligning global mobility strategy with business and talent strategy means designing a global mobility strategy that supports both the organizations business goalswhat it wants to accomplish in the marketplace and its talent development goalswhat it wants its key talent to learn about working in a global environment. In this way, global mobility evolves from a

108

The Talent Paradox: A 21st century talent and leadership agenda

check-the-box exercise to a key enabler of business and talent development strategy. We know of several companies that are starting to use global mobility as a strategic tool, not only to advance business goals in different areas of the world, but to give future leaders the global experience and perspective that they will need to run a world-spanning enterprise. (Some of these companies even require that all of their top executives have prior experience working outside their home countries, a requirement that we expect more companies will adopt in coming years.) Employees themselves are often coming to view international assignments as a way to develop their skills and deepen their experience, creating a demand for assignment opportunities that an organization can use to its advantage. Instead of occurring in an ad hoc, caseby-case manner, assignments guided by a strategically aligned global mobility strategy take place in the context of an overarching

THE CHAnGInG FACE OF GlOBAl mOBIlITy


The results from a 2010 survey highlight the increasing reach of global mobility. Respondents reported that they expected countries such as China, India and the United Arab Emirates to emerge as important assignment destinations taking assignees far afield from the more traditional destinations in the United States and Western Europe. Top emerging destinations for international assignments1 China 7% Singapore United states India United Arab Emirates Canada United kingdom Saudi Arabia Brazil Australia 6% 5% 5% 4% 4% 4% 4% 3% 3%

Figures represent the percentage of respondents identifying that country as an emerging destination

109

Talent

plan that considers how each move will help further the organizations overall business and talent development objectives. Leaders can then articulate the specific benefits that they expect each assignment to deliver to the enterprise, as well as the specific learning and development objectives that they expect each assignee to pursue while abroad. This, in turn, allows leaders to give each assignee clear direction on what he or she must accomplish and to compare each assignments actual results with the expected results, an essential part of measuring the global mobility programs return on investment. One tool that can help leaders better align global mobility strategy with business and talent strategy is the global mobility framework shown in Figure 1. The framework is built around two key dimensionsbusiness value and talent development valuewhich reflect the fact that different assignments can have different value for the business, as well as different value for helping employees develop new skills
Figure 1. Global mobility framework

and capabilities. By categorizing assignments into the four quadrants shown in Figure 1, the framework can help leaders: Articulate the nature and extent of the value they expect to gain from the companys global mobility efforts, making it easier to set clear expectations for assignees and measure their performance against expected results. Decide what proportion of the companys assignments should fall into each category, depending on the organizations current and anticipated future business and talent development needs. Determine what kinds of employees would be most appropriate to send on which types of assignments. This framework can help a company avoid a seat of the pants approach to global deployment in favor of a deliberate process that views each assignment as an opportunity for the

HIGH

Learning experience
TARGET EMPLOYEES: Rising stars Employees looking for diversity in experience and personal growth GLOBAL MOBILITY APPROACH: Expat light Focus on development Expect participants to bear some of the burden

Strategic opportunity
Target employees: Future leaders superstars GLOBAL MOBILITY APPROACH: Expat plus Focus on development, experience and retention Enhanced future opportunities

Development value

Commodity job
TARGET EMPLOYEES: Volunteers Low-cost talent GLOBAL MOBILITY APPROACH: Minimal perks and support Local transfers At risk assignment

Skilled position (management or technical)


TARGET EMPLOYEES: Demonstrated performers Deep, specialized skill sets GLOBAL MOBILITY APPROACH: Short-term or local plus Project-based assignments Rapid deployment

LOW

Business value

HIGH

110

The Talent Paradox: A 21st century talent and leadership agenda

Figure 2. From strategy to execution

Global mobility portfolio framework

Execution framework
Global employee rewards Global mobility and workforce strategy

Development value

Learning experience

Strategic opportunity

Global mobility service delivery

Commodity job

Skilled position (management or technical)

Technology

Business value Once the global mobility strategy has been aligned with business and talent strategy, companies can use four building blocks global mobility and workforce strategy, global employee rewards, global mobility service delivery and technology to execute the global mobility strategy.

organization to further its overall strategic objectives. One global consumer products company, for example, used the framework to understand how its global mobility program could better support two of the companys key talent management goals. The first goal was to develop future leaders with the international perspective and experience needed to effectively manage a global business. The second was to build stronger capabilities in various countries and regions where executives felt that the companys talent bench was weak. Historically, the majority of the companys international assignments had been skilled position moves short-term reactions to an immediate skill gap in the destination country. These assignments met a critical business need for a specific type of talent but did not necessarily help develop the assignees skills or enhance the local workforces capabilities. Little thought was given to the impact of a move on an assignees career or which individuals could best capitalize on the development opportunities presented by international assignments. Moreover, assignees were rarely chosen with an eye to the skills they could teach local talent. Although leaders recognized that skilled position moves were and would continue to

be important, they also realized that they were not the most effective way to either develop future leaders or transfer capabilities to the host countrys workforce. The company therefore created a new global mobility strategy that specified that half of the companys total number of assignments should be distributed among the strategic opportunity, learning experience and commodity job categories. Each of these assignments would be offered to specific types of employees, and each of them would carry a different set of performance expectations as well as receive tailored support from the company to support the assignments specific talent and business objectives. By developing and communicating this strategy, leaders were able to give the companys managers effective guidance on how to use the global mobility program to support the companys key talent development goals. Business leaders and hiring managers can now take a more strategic approach on which employees to consider for assignment, where to send them, and what the company expects from them while abroad all of which had previously been decided based on more limited tactical considerations.

111

CASE STuDy: REAllOCATInG THE WORK


One life sciences companys global mobility function was drawing criticism from both business managers and international assignees for unsatisfactory service. Business managers felt that they lacked guidance on how to effectively select assignees, plan assignments and choose assignment policies. Many assignees reported that in the initial conversations about assignment, expectations had not been appropriately set regarding the impact of the assignment on themselves and their families. Upon investigation, the company found that the global mobility function was spending almost all of its time coordinating assignee services, with very little effort going toward offering business managers the advice they needed. Further, the global mobility function was often not even notified about assignments until the assignment was planned, the candidate selected and expectations already established. The company realized that many of the coordinating activities that were being performed in the global mobility function could actually be done more effectively elsewhere. For instance, certain administrative tasks, including the recharging of assignment costs, could easily be taken over by resources in the companys HR and finance shared services organization (SSO). This would not only free up global mobility function staff to focus on advising the business and counseling assignees, but also improve administrative service delivery quality: The HR and finance professionals in the companys SSO would bring function-specific skills to their tasks that global mobility staff had historically lacked. The company reorganized roles and responsibilities in the global mobility function and its SSO to move a number of transactional HR and finance activities to SSO staff. In addition, leaders hired outside vendors to perform some specialized activities formerly housed in the global mobility function. Meanwhile, to address the businesssww needs for global mobility advisory services, several global mobility staff were reassigned to business support roles that would work with business managers and HR personnel to plan and help manage assignments from a strategic perspective. And the company redefined the global mobility directors role as an ambassador for international assignments, focused on educating and communicating with business leaders about global mobility and driving program innovation.

112

The Talent Paradox: A 21st century talent and leadership agenda

Investment alignment

uch of a companys investment in global mobility consists of the cost of assignee rewardstypically the largest expense in a global mobility programs budgetplus the cost of the services and support (such as language training and relocation assistance) offered to assignees before, during and after the move. Thus, aligning global mobility investment with expected assignment value is largely a matter of tailoring the cost of each assignees rewards and support packagethe assignment policy under which he or she travelsto the value he or she is expected to generate while on assignment. Many companies maintain only a few types of assignment policies to deliver rewards and support packages to employees. Typically, these policies classify assignments by their duration so that, for instance, one policy covers shortterm assignments, another covers long-term assignments, and a third covers permanent transfers. The problem with this approach, however, is that it fails to align the amount of the companys investment with the potential value an assignment can generate. For example, to use the terminology of Figure 1, both a strategic opportunity and a commodity job assignment may require an assignee to spend three to four years abroad. Under the traditional approach, both of these assignees would be transferred under the same long-term policy, even though the two assignments would be expected to deliver very different kinds of value to the business. To help avoid mismatches between investment and prospective return, companies can create a wide range of global mobility policies, each of which offers assignees a unique set of rewards and support packages. Leaders can then choose which policy would be appropriate for a particular assignment based on the value the assignment is expected to generate. In particular, companies may wish to create policies that align rewards and support

packages with the four different types of value depicted in Figure 1: Strategic opportunity assignments have a significant and lasting impact on a company and should be reserved for a companys most valuable employees the next generation of leaders. Policies for these types of assignments should make every effort not only to provide participants with a satisfying international experience, but also actively work to maximize development and retention. These policies are expensive, but rightly so after all, they focus on delivering high business value activities and developing a companys most promising talent. The good news is that, for most companies, their existing global mobility infrastructure probably provides a solid foundation for this type of assignment. They simply need to increase their emphasis on development and retention. Learning experience assignments are most appropriately suited for rising stars: employees with long-term potential who are worth investing in, even if the immediate payoff is relatively low. Global mobility policies for these types of assignments might best be viewed as a scaled-back version of the current high-touch model. Although assignees would be well cared for, they would be expected to shoulder part of the burden and costs as a personal investment in their own capabilities and value. Hence, participants should expect fewer relocation benefits than with a traditional foreign assignment or strategic opportunity. Skilled position assignments center on filling workforce gaps with deep, specialized talent for a limited period of time. They are well suited for demonstrated performers with highly specialized skills people who are already performing at or near their full potential. Policies for these assignments need to support the companys ability to deploy people rapidly, enable stress-free moves that let assignees focus on the job at hand, and repatriate assignees as quickly
113

Talent

and painlessly as possible. One example of such a policy might be a commuter arrangement in which an employee lives in one country but works in another, either physically moving from country to country or collaborating virtually with his or her out-of-country colleagues. Finally, commodity job assignments are targeted at individuals who are interested in working abroad for personal reasons but do not need or expect much in terms of business perks and support. Relocation benefits and support for a commodity job would generally be minimal, with employees expected to handle most or all of their moving expenses. The experience of one global consulting company shows how an organization can tailor its global mobility investments to match expected assignment value, driving down costs and improving talent development as a result. This company originally handled international moves through a handful of policies, of which by far the most heavily used were the companys traditional long-term and traditional short-term policies. Both of these offered assignees a relatively high level of support in terms of home leave, relocation assistance and other services, but many assignments fell short of leaders and employees expectations. The company also had a short-term light policy designed to send people abroad for short periods of time at moderate cost, but only a small percentage of the companys total number of assignees traveled under that policy. To better align costs with value and enhance talent development, the companys leaders rethought the way they defined and selected the policies under which their assignees traveled. They redefined their universe of assignment policies to discriminate more precisely among assignments with different levels of business and talent development value. Rewards and support packages could then more closely match each assignments expected value.

To this end, the company created two new assignment categoriesa strategic opportunity assignment and a high-support client need assignmentto take the place of its traditional long-term policy. Both of these new policies offered assignees a similar level of financial support, but the career development support and justifying criteria for each assignment type differed significantly. Strategic opportunity assignments were meant for future company leaders, and assignment goals would emphasize gaining leadership skills and experience in addition to meeting immediate business needs. In contrast, high-support client need assignments were to be used for subject matter specialists sent abroad to fill urgent skill gaps, whose goals would focus on fulfilling business needs rather than on skill development. The company also created categories for capability building assignments and midsupport skill need assignments to take the place of its traditional short-term policy. Capability building assignments were to be used for high-performing employees who could benefit from international experience; the goals for assignees deployed under this policy would emphasize skill development. Mid-support skill need assignments were to be used for mid-career specialists sent to fill moderately urgent skill gaps; these assignees goals would focus on meeting business needs. To help managers select the appropriate policy for particular assignments, the company developed criteria for what types of employees and what kinds of assignments were eligible for each type of policy. A decision guide was then developed to match the appropriate category with each assignment opportunity, starting with the assignments business and talent development objectives and drilling down to specific policy options. By encouraging managers to plan assignments based on value rather than assignment length, the tool allowed the company to greatly expand the proportion of assignees traveling under the more cost-effective categories of assignment, with a corresponding reduction in the proportion of

114

The Talent Paradox: A 21st century talent and leadership agenda

employees traveling under the more expensive policy types. By allowing the company to allocate investments more appropriately among assignments that created different types of value, the new set of policies and the accompanying guidance on policy selection helped reduce global mobility costs by 15 percent of the total annual program cost within six months. Moreover, by identifying strategic opportunity and capability building assignments as such, the company has been able to set goals for these assignees specifically aimed at enhancing their development.

as for mainstream HR activities can increase efficiency, reduce costs, streamline assignees service experience and improve leaders ability to track and manage globally mobile talent. The following are four areas in which companies could benefit from integrating global mobility more closely with mainstream HR and talent operations:

Employee rewards administration


Although expatriate rewards programs require specialized business insights to design, they can often be administered through the same HR processes and systems that serve nonmobile employees. We have encountered many situations where the global mobility function maintains processes that parallel or even duplicate those already in place for local benefits administration. By leveraging its existing investment in local rewards administration to deliver services to assignees, an organization can reduce costs as well as potentially improve the quality of service. For example, one companys global mobility function had a dedicated process for handling benefits enrollment for assignees working in the United States a process that essentially duplicated what HR was already doing for local employees. By focusing on better integration, the company and its outsourcing vendor were able to modify the process to accommodate enrollment for both U.S. and non-U.S. employees. This significantly reduced the amount of work performed by the global mobility function, as well as streamlined the enrollment process for assignees.

Operational alignment

lobal mobility is often perceived as a niche activity that requires expert handling in everything it touches. Because of this, the global mobility function has historically been asked to both oversee and deliver all services to expatriates. However, in recent years, many companies have adopted global HR service delivery and talent management models that include HR groupssuch as regional or global HR service centersthat already do much of this type of work as their full-time job. In an age when many organizations have made substantial investments in HR infrastructure and operations, the time is ripe to begin integrating global mobility into core HR service delivery models. Although the details of moving employees from country to country may still require specialized guidance from the global mobility function, the HR function at most larger companies today has sufficient capabilities to take on much of the day-to-day work of executing global moves. Transferring the global mobility functions routine responsibilities to HR can yield benefits in two ways. By relieving global mobility staff of many administrative duties, it can help refocus the global mobility function on highervalue activities, such as advising business managers on how to apply the companys global mobility strategy. At the same time, using the same infrastructure for global mobility

HR service delivery
Many companies can find a number of opportunities for integrating global mobility service delivery more fully with broader HR processes and infrastructure. For example, apart from relocation, most international assignees have essentially the same basic HR service needs as other employees in the host country. Rather than handling assignees day-to-day inquiries and requests through the

115

Talent

global mobility function, a company can both reduce costs and improve assignees service delivery experience by allowing assignees to use the same resources and tools that local employees use.

Technology
Companies may need to deploy specialized global mobility technology to satisfy unavoidable requirements specific to mobile employees, including complying with certain types of taxes and regulations or managing multiple performance reviews for managers in multiple countries. But they should also try, whenever possible, to leverage the HR technology being used by other employees to deliver services to the mobile workforce. For instance, a company could build integrated online self-service applications that allow mobile employees to manage work/life events (such as childbirth or illness) in the same way that local employees do. Using the same systems to deliver services to assignees as to the nonmobile workforce can reduce the need for manual processing by the global mobility function, thereby reducing costs and freeing the global mobility function to focus on more strategic issues. It can streamline service delivery to assignees, reducing their administrative hassles and providing a more pleasant assignment experience. And it can give leaders a more complete view of the global workforce, helping the business more effectively deploy returning assignees to appropriate positions.

Talent management
At many companies, assignees essentially drop out of the companys standard talent management processes during their time abroad. The frequent result is that companies must scramble to find assignees a position when they return home and the position that the assignee eventually winds up with may not use his or her new skills to their full potential. To combat such issues, we suggest setting up mechanisms that allow international assignees to stay appropriately plugged in to their home country talent management processes. One way to do this is to designate an assignment sponsor or assignment supervisor in the assignees home country who would represent the assignee in the talent management process (e.g., performance reviews and end-of-year evaluations). The assignment sponsor would also be responsible for working with the home countrys talent management group to find an appropriate position for the returning assignee, as well as for monitoring the assignees progress toward development goals. Its also important to make sure that assignees stay on the radar of the enterprises overall succession planning and long-term talent management processes. Ideally, the talent management and succession planning processes would have full visibility into the total population of assigneesthe countries each has worked in, their performance at home and while abroad, their probable career pathsso that internationally experienced talent can be quickly identified and deployed as necessary. An enterprises talent management and succession management processes should not only be able to find an assignee an appropriate role immediately upon his or her return, but proactively plan for how the assignee might be deployed three, five or 10 years in the future.

Why align? The benefits

n our experience, companies that take steps to better align their global mobility programs in the ways described above can enjoy a number of benefits: Aligning a companys global mobility strategy with its business and talent strategies allows leaders to use the global mobility program as a focused tool to pursue both business and talent management value. It can help the company define and effectively pursue specific business and talent development goals for each assignment, improving leaders ability to understand the value global mobility delivers and the global mobility programs return on investment.

116

The Talent Paradox: A 21st century talent and leadership agenda

Aligning a companys global mobility investments with the value each assignment is expected to yield can help keep costs in line with the global mobility programs business and talent development returns, while still meeting assignees needs during and after their deployment abroad. Aligning global mobility operations with mainstream HR and talent operations can help reduce costs, give assignees a smoother service delivery experience, and refocus the global mobility function from administration to helping the business think through strategic talent issues. It can also help companies take better advantage of its mobile talent by improving visibility into assignees performance and career development. Given the central role of global growth across all aspects of business in the coming decade, we think that global mobility should be a priority for any internationally active company. And to do global mobility well, it is vital to achieve alignment in all three of these areas. Such alignment, in our view, is key to a companys ability to make smarter moves. Originally published in Deloitte Review #8, 2011 About the authors Jeff Schwartz is a principal with Deloitte Consulting LLP and U.S. leader for all talent services and solutions. Gardiner Hempel is a partner with Deloitte Tax LLP and leader of the Global Mobility Transformation practice. The authors gratefully acknowledge Jonathan Pearce, Michael Gretczko, Angelo Tierno and Richard Wildt for their contributions to this article.

Endnote
1. Global Relocation Trends: 2010 survey report, Brookfield Global Relocation, 2010.

117

118

Deep Talent, Vast Distances


Realizing the full value of global knowledge workers
By Frederick D. miller, Bhushan Sethi and vivek Sethia with Ryan Alvanos > Illustration by Josh Cochran

ompany leaders are often quick to acknowledge, even revere, the importance of human capital in their organizations. Our growth depends on people and similar sound bites echo through many CEO speeches and litter corporate homepages like the last refrain in a many-versed ballad. Yet, catchphrases and buzzwords offer little clarity when it comes to the ins and outs of building and keeping a workforce. Fast-paced, global markets often pin growth strategies on knowledge work from complex analytics to product design and these arent always easy jobs to fill. As a

result, the pursuit of the almighty employee leads many organizations overseas: by 2010, offshoring knowledge work will become a $17 billion industry.1 After finding an abundance of available workers on another continent, however, many companies encounter performance shortcomings that seem to undermine their hopes of easing workforce shortages by going overseas. Even as talent management mantras become clich, making knowledge work productive may represent the first great management challenge of this century, just as manual labor was to the last.2

119

Talent

Figure 1. The global operating model

CENTRALIZED

MANAGED BY

CENTRALIZED GROUP

Supports effective decision-making and provides independence to the regions


MANAGED BY

Establishes balance in decisionmaking between the regions and head ofce


H.O. & REGIONS

Provides disruption in workow if different regions have alternate solutions

DECENTRALIZED

Creates challenge in the regions to comply with the overall organizational strategy
MANAGED BY

Causes barriers in the regions to follow the overall business strategy


REGIONAL CENTERS

Causes coordination challenges among the various regions

INDEPENDENT

SEQUENCED WORKFLOW

INTEGRATED

Opportunities for growth can buckle under the profound challenges of enabling a global workforce. Among the most vexing are: Management and staff resistance to working across borders Underutilization of staff capabilities in developing countries Ineffective handoffs between organizations Staff turnover and rapidly escalating wages in developing countries3 Lack of shared goals and objectives to drive effective collaboration Negative impacts on staff morale and working climate Addressing these challenges and improving the effectiveness of global organizations require
120

answers to two structural questions. First, how will companies manage decision-makingthe assignment of responsibilities and roles in a projectacross geographically and culturally diverse operations? The second question concerns workflow: How will global organizations move information, activities and products from one location to another, and how will this impact an organizations effectiveness? In the absence of formal frameworks or guidelines for managing these issues, companies have taken a variety of approaches. Some acquire businesses that already conduct knowledge work in emerging markets. Others hire people in developing countries in hopes of cultivating a talent pool that will eventually assume middle management positions. Others have opted to move in-house knowledge work to external global service providers. Each of

LOCATIONS COLLABORATE WITHIN SINGLE PHASE

HANDS OFF FROM ONE LOCATION TO ANOTHER

Creates challenges in aligning authority with responsibility


PERFORMED BY STANDALONE LOCATIONS

Limits the independence of regions to perform their work

Allows organization to manage coordination problems that arise between regions and head ofce

DECSION-MAKING STRUCTURE

SHARED

The Talent Paradox: A 21st century talent and leadership agenda

these alternatives can flounder without attention to decision-making and workflow because they lack a formalized structure for addressing challenges as they arise. Companies beginning offshore operations soon discover that there are more than oceans dividing their workforce. Cultural and working norms, motivational factors, types of incentives and rewards, and attitudes toward new processes or tools can hinder talent management across borders. Complications abound. As Western interests exhaust the supply of available knowledge workers, ambitious employees embrace an up-or-out mantra, forcing companies to renegotiate salaries frequently in order to retain their workforce. Additionally, the deeply ingrained Asian cultural sense of hierarchy can stifle dialogue with remote managers. Just the same, companies tend to overlook formal integration and governance of workflow across geographic locations. They need to consider the interplay between decision-making and workflow to address the various facets of organizational design, including the alignment of incentives and rewards, the development of knowledge work capabilities, the management of intercultural differences, and the utilization of communication processes and tools.

company might organize independent research centers in different locations, each focused on a specific drug or disease family. All research on hypertension drugs might take place in a developing country, research on cancer drugs in Europe, and so on. Because each entity is a stand-alone unit, companies often find this structure comparatively easy to manage as long as they can also find sufficient talent at each location. One trade-off involves cost, as this model requires duplicated functions at each location.

Sequenced workflow
Here, each location performs one part of an overall process and then hands projects off to the next location. This model could work well for a pharmaceutical company. Genetic research to identify prospective drugs might happen in one country, then an office in a second country would assume drug development tasks. A third location might conduct early-stage testing, and a fourth would complete subsequent trials. Work tends to be unidirectional, with a small number of definable handoffs. This value chain model can be more economical than the independent work model, but it requires a higher degree of collaboration across locations.

Two Dimensions
model for framing governance and workflow across global operations would look something like figure 1. The first dimension of managing knowledge work across borders involves workflow, the horizontal axis of the model. Effectively dealing with globalization requires an understanding of how to apportion knowledge work across different locations. Most effective global operations use one of the following three approaches:

Integrated workflow
This approach allows knowledge workers in different locations to collaborate within single phases of a project, even working around the clock as employees pass projects to collaborators in different time zones. Companies generally find this to be the most challenging model because it requires the most coordination, which often calls for sophisticated collaboration and version control tools. These varying approaches to workflow represent ideals for describing how work is organized on paper. Combinations and accommodations among these models improve their effectiveness in the real world. It is also worth noting that these approaches are not a hierarchy or a maturity model. There is no reason
121

Independent workflow
With this approach, standalone, vertically integrated organizations perform work in different locations. For instance, a pharmaceutical

Talent

to believe that organizations should pursue increasing interdependency over time. Instead, the nature of the work and the scope of the relationships between locations should determine which will be most effective. The second dimension of the model deals with the governance that structures decisionmaking responsibilities pertaining to knowledge work. These responsibilities include financial and capital investment decisions, managing human resources, setting performance expectations, and monitoring quality requirements. Three structures seem to encompass most effective endeavors pertaining to decision-making:

Workflow at Work
north American hardware and software developer decided to move most of its entry level engineering workforce over to Asia in an attempt to reduce costs. The existing U.S.-based workforce remotely managed and developed their colleagues overseas. Workflow, in this example, was integrated across levels of U.S. management and the Asian workforce, and decision-making was centralized in the United States. In practice, however, things did not go well. Morale suffered and turnover became an expensive problem. Asian employees plugged along with the same work as their U.S. counterparts, but began to wonder when they would ever be able to manage their own work. They also believed that their inability to interact with clients stunted their personal development. At the same time, Western managers saw the ranks they climbed now operating at a fraction of the cost from across the ocean. With good reason, they began feeling insecure about their own positions. Rather than trying to integrate with the Asian office, Western workers tried to improve relations with their bosses at the expense of their offshoring operations. Time difference and language barriers became ongoing problems that were never really addressed, so frustration rather than opportunity prevailed in their offshoring program. Workers on both sides of the pond began asking the obvious questions about career paths, and the company couldnt come up with a good answer. A second Western technology company wanted to grow its global presence and maintain cost competitiveness, so it developed an offshoring program in India that used an integrated model for product design and coding projects. Interestingly, they developed a rigorous talent model that divided workers across geographic locations into product-focused teams. Rather than organizing its workforce based on function (teams of coders working with teams of designers), the company created teams based on the needs of a specific project.

Centralized decision-making
This structure refers to governance coming from a single country, usually the companys home country. Most decisions come from a centralized decision-making group, such as a head office or a virtual decisionmaking committee.

Shared decision-making
In this model, governance and knowledge work occur at the same location. The company then organizes the decision-makers to direct the project with a single voice.

Decentralized decision-making
Governance occurs on-site here as well. Unlike shared decision-making, however, these decision-makers act independently of one another. The many facets of workflow and governance go a long way in determining the outcome of an offshoring program. Companies have to balance the integration of people and resources across cultural and geographic divides and maintain the ability to control an organization across several fronts and manage performance. Its all in the structure.

122

The Talent Paradox: A 21st century talent and leadership agenda

Managers simply needed to specify which work tasks were required by a given project, and staff with the necessary skills would be assigned, which improved their ability to develop several products simultaneously. The company divided job domains into a detailed list of tasks and requisite skills. Staffing decisions could then consider cost requirements. Overall, the company reports that this staffing model has worked well. By spreading work across many countries, the second company reduced the opportunity for animosity along specific geographic lines. Yet, much of the discontent among Asian workers in the first company focused on a lack of opportunities for promotion. The second company didnt use straightforward promotional paths; instead, it left career progression undefined, accepting a high level of turnover among its lower-cost workers. Working for a big, brand name company carries a great deal of cultural and professional weight in India. Many employees agree to lower salaries in exchange for strong rsum lines and prestige. This made it easy for the company to recruit replacements using their well-known brand, but harder to retain the talent they already had. Combining sequenced or integrated workflow with centralized decision-making may have many advantages, including being easier to launch, but it appears to raise many questions in the area of career paths. This combination can lead to perceived professional dead ends for offshore employees and Western managers alike: offshore employees bemoan limited prospects for climbing the Western corporate ladder, while Western managers worry about shipping career paths overseas.

Governance at Work

he divergence of decision-making models had interesting implications for two pharmaceutical companies. The first, a North American pharmaceutical giant, saw India as an opportunity to reduce costs and deepen its talent pool, so it relocated its clinical data management center. The centers responsibilities included analyzing

and cleansing clinical data and creating reports to support clinical trial evaluation. Its approach combined a sequenced workflow structure and centralized decision-making a head office issued requirements to teams. Several challenges arose due to insufficient investments and inadequate consideration of cultural differences among the workforce. Most notably, work produced in the offshore location did not always satisfy the expectations of the home office, and challenges were not communicated or resolved in a timely manner, resulting in significant delays. Failure to provide training programs, international experience and defined career opportunities to the centers employees hindered productivity and morale. It also failed to align salary structures with the local expectations. Workers realized that low-cost centers imply theyre working for less than their Western counterparts. At the same time, rewards, bonuses and other perks like cars and accommodations are a big deal when determining compensation. The operation did not deliver against its expected outcomes, resulting in high turnover, loss of quality and credibility, and an eventual management decision to close the facility and outsource its operations. In another example, a major European pharmaceutical company also sent its drug development operations offshore, but with different results. It opened two centers in Asia to cut costs and address critical talent gaps. It gave these centers responsibility for preclinical and post-drug-development support. Based on employee skill sets, the centers adopted three different approaches: sequenced workflow for statistical analysis, integrated workflow activities across preclinical trials, and independent workflow for medical writing projects. All were governed by centralized decision-making from Western headquarters. To date, the results from all three operations have been good. The contrast between the two pharmaceutical companies is striking. The second, more effective approach paid substantial attention to how different types of work were organized. The first companys sequenced approach may have been appropriate, but
123

Talent

its decision-makingtoo tightly controlled from the centerdid not allow the offshore organization to flourish. As the second companys situation shows, central control is not a prescription for failure. However, careful attention must be paid to how control is shared across locations. Spreading control of decision-making too thin across a company compromises its efficiency and organization. At the same time, tight, centralized control can constrict the development of offshore operations. Ultimately, companies need to strike a balance between these two extremes so that offshore operations are governed enough to perform and flexible enough to develop.

Closely connected workflow requires more active and consistent leadership. Shared decision-making seems desirable, but it requires more time and effort. Centralized decision-making works in some cases but not in others. Proximity to end-product markets and customers should determine governance models. For example, if the end users of a product or service are based in the United States, centralized decision-making in the United States is likely the most effective approach because its most connected to the consumer base. If markets are more diverse, decentralized governance can add flexibility and understanding of consumer needs to address a broader set of expectations.

Planning Structure and Considering Talent

rom these four case studies, the mixed results of globalizing knowledge work are very evident. These representative effective and ineffective approaches to complex offshoring programs shed some much needed light on a few important points about organization models: The independent model appears easiest to operate if the requisite talent exists in one location because it requires less interaction across borders. However, this is usually the most expensive approach. Sequenced and integrated workflows require greater degrees of management over the assigned tasks and handoffs between locations. Sequenced workflows require clear break points at which one phase ends and another begins; integrated workflows do not. To make either approach work, management must address how career paths will operate in all locations. This issue is critical to morale, retention and cooperation. Independent workflow can coincide with decentralized decision-making. However, it is difficult to imagine how decentralized decision-making could provide adequate governance over an integrated workflow.

Offshore Flow

he financial success of a global organization may well hinge on the ability to manage knowledge work across national borders and navigate a diverse set of personal and professional expectations. Formalizing workflow and governance structures across offices can help knowledge work become more effective and give multinational companies opportunities for expansion while addressing the challenges and growing pains that inevitably arise. Organizations trying to design effective global knowledge work should consider the following actions: Analyze how much interaction the offshored work requires, and design an organization to support that interaction effectively. Take the time to clearly define the roles and responsibilities of organizations, functions and jobs and the time to help all participants understand those definitions. Think through the governance model that is in use. Has it been modified appropriately for the new global structure? Build recruiting, retention, performance management, and career development policies and procedures that recognize both

124

The Talent Paradox: A 21st century talent and leadership agenda

local requirements and the inevitability that employees in different locations will need to collaborate and will share information. Align existing incentives and rewards across the global knowledge workforce. This does not mean that all people in all geographies are treated exactly the same, but the system should be perceived as equitable. Proactively monitor working relationships across borders and hand-offs in the value chain to determine how effectively they are working, and make any necessary changes quickly. Provide opportunities for face-to-face interaction between workers in different geographies to promote relationship building. With this perspective, we believe global knowledge work can rise from being a good idea on paper to one that delivers real benefits. The world is ripe with talent, and offshoring work remains an immensely rewarding strategy. It is up to management teams worldwide to put in place the workflows that fully utilize their hard-won talent. Originally published in Deloitte Review #3, 2008 About the authors Dr. Frederick D. Miller is a director with Deloitte Consulting LLP in their Organization and Change service line. Bhushan Sethi is a senior manager with Deloitte Consulting LLP in their Organization and Change service line, and deputy lead of Deloittes Organization Strategies service offering. Vivek Sethia is a senior consultant with Deloitte Consulting LLP in their Organization and Change service line. Ryan Alvanos is a writer and editor in Deloitte Research, Deloitte Services LP.

Endnotes
1. 2006 Report by GlobalSourcingNow Offshore Outsourcing Research Firm by Evalueserve 2. Drucker, Peter. Age of Discontinuity. (Transaction Publishers, 1992) 3. Annual labor costs for a senior engineer range from $150,000 to $200,000 in the United States, compared with $30,000 to $40,000 for equivalent talent in India, or one-fifth of the U.S. cost, according to Ayan Mukherjee, Wipro Ltd.s North American vice president for R&D services

125

Talent

126

The Talent Paradox: A 21st century talent and leadership agenda

Decisions: Numbers, human nature and performance

127

Talent

128

The Talent Paradox: A 21st century talent and leadership agenda

Irrational Expectations
How statistical thinking can lead us to better decisions
By James Guszcza and John lucker > Illustration by Sterling Hundley

Behind door #1

eaderS of a certain age who grew up watching U.S. television fondly rememberwell lets just say rememberthe game show Lets Make a Deal, hosted by Monty Hall. At a key point in each episode, a contestant was asked to guess which of three doors#1, #2, or #3concealed a valuable prize (say, a woodpaneled station wagon). To build suspense, Monty would first open one of the two doors that the contestant didnt choose. Pointing out that the door he opened had not concealed the prize, Monty would offer the contestant the option to change his or her guess. Suppose you are a contestant and you have guessed that the car is behind door #1. Monty then opens door #3, revealing not the car but a barnyard goat. Monty then gives you a choice: you can stay with your original guess, or change your guess to door #2. What should you do? Should you switch to door #2, or stick with door #1? If your answer is that it does not matter, you are not alone. Most people intuit that after Monty revealed the goat behind door #3, the probabilities of the car being behind doors #1, #2, and #3 go from 1/3-1/3-1/3 to 1/2-1/2-0. Therefore Montys opening door #3 should have no bearing on your subsequent decision

about whether to switch from door #1 to door #2. But this common answer turns out to be wrong: if you switch from door #1 to door #2, you double your chance of winning. Few peoplethese authors includedcan correctly solve problems like this in real time, and most people have difficulty with such problems even given unlimited time. In fact, when this problem was popularized by Marilyn vos Savant in Parade magazine in 1990, thousands of readers, hundreds of whom were mathematicians, wrote back to Parade, chiding vos Savant for publishing the wrong answer. Even the eminent mathematician Paul Erds reportedly pondered the Monty Hall problem on his deathbed.1 The Monty Hall problem is significant beyond being a mere brain teaser. In all areas of business, people must constantly process information in real time to arrive at decisions. To avoid becoming overwhelmed, decisionmakers inevitably rely on intuition, heuristics and other mental short-cuts when weighing various factors. Unfortunately, as the Monty Hall problem so vividly illustrates, our unaided intuitions are quite capable of leading us astray. This happens much more regularly and severely than people realize. Recent advances in cognitive science and behavioral economics

129

Talent

have taught us that in a surprising array of domains, human decision-makers need statistical tools just as badly as nearsighted people need eyeglasses. The human mind simply did not evolve to make the kinds of decisions we are called on to make every day in business settings. Statistical analyses and predictive models are the necessary correctives. The business implications of these insights are considerable.

manthe notion that each of us thinks and chooses unfailingly well, and thus fits within the textbook picture of human beings offered by economists. If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBMs Big Blue, and exercise the willpower of Mahatma Gandhi. Really. But the folks that we know are not like that. Real people have trouble with long division if they dont have a calculator, sometimes forget their spouses birthday, and have a hangover on New Years Day. They are not homo economicus; they are homo sapiens.2

Ecce homo

ntil recently, much of the economic theory underpinning business practice has paid little heed to the sorts of cognitive limitations exemplified by the Monty Hall problem. Indeed a central tenet of much modern economic theory is the assumption of rational expectations. This is the notion that peoples guesses, or expectations, about the future areon averagethe best ones possible because they take into account all available information. Of course individual people make incorrect guesses all the time. But according to rational expectations, their guesses should diverge from the truth in random ways that average out to zero. To the extent economic actors are rational, it should be impossible to profit from relevant information that is widely available: somebody else would have already used it to make a profit. Hence the old joke about the Chicago economics professor who refused to pick up the $20 bill on the sidewalk on the grounds that if it were real, someone else would already have picked it up. In a phrase, the doctrine of rational expectations implies that markets are efficient. In their new book Nudge, University of Chicago behavioral economist Richard Thaler and law professor Cass Sunstein attempt to debunk the assumption of rational expectations as a distracting myth:
Whether or not they have ever studied economics, many people seem at least implicitly committed to the idea of homo economicus, or economic

When considering the efficiency of various markets, it is useful to remember that these markets are run by fallible homo sapiens, not idealized homo economicus. This insight was not lost on Monty Hall and the producers of Lets Make a Deal.

A new ballgame

hiS is the themeeither implicit or explicitunderlying a spate of recent books about the growing ubiquity of analytic and predictive modeling applications in fields such as business, law, medicine, education and even professional sports. In his 2003 book Moneyball, Michael Lewis described a new way to think about managing the business of Major League Baseball. Lewis related how the Oakland As general manager Billy Beane was able to take his cash-strapped team to the top of the American League through the use of statistical analysis.3 Beanes problem was that wealthier teams such as the New York Yankees, with many multiples of the As salary budget, could outbid the As when scouting for new talent. Beane addressed this problem with a crucial insight: baseball scouts often use flawed reasoning and fallible gut feelings or professional judgment when selecting baseball players. Beane realized that by using a more objective approach, he could identify excellent players

130

The Talent Paradox: A 21st century talent and leadership agenda

Beanes problem was that wealthier teams such as the New York Yankees, with many multiples of the As salary budget, could out-bid the As when scouting for new talent. Beane addressed this problem with a crucial insight: baseball scouts often use flawed reasoning and fallible gut feelings or professional judgment when selecting baseball players.
ignored by the richer teams and lure them to the As at bargain salaries. As recounted by Lewis, Beanes insight was borne of personal experience. As a high school player, Beane was singled out by the scouts as a future baseball star. The scouts judgments were based mostly on appearances and intuitions and hardly at all on baseball statistics. When the scouts evaluated him, they saw a fit athlete, a fast runner and strong batter: somebody who simply looked the part of a good baseball player. They didnt have to think hard about the statistics; it was simply obvious to them that Beane had the makings of a top baseball player. But the scouts turned out to be wrong. Billy Beane failed to thrive as a big league player and ultimately quit to become a scout for the As. By the time he made general manager he was determined not to repeat the mistakes of the scouts who had singled him out in high school. Beane turned to the writings of the baseball statistician Bill James in order to take a more scientific approach to evaluating baseball players. For example, James had constructed a formula that could predict the number of runs a hitter is expected to create as a function of his on-base percentage. Taking his cue from James, Beane hired Paul DePodesta to statistically analyze players performances. One of Beanes and DePodestas findings was that college baseball players went on to perform better than high school recruits. Based on this finding, Beane decided to let the richer teams spend their time recruiting players out of high school while he and DePodesta used their statistical analyses to select the excellent college players ignored by the scouts. In short, Beane realized that the market for baseball players was inefficient because it was dominated by scouts making decisions based on intuition rather than objective, datadriven analyses. To borrow a phrase from the medical profession, you might say he took an evidence-based approach to player selection. Because of this, Beane was able to, as Lewis put it, run circles around taller piles of cash.4

Analyzing analytics

hy do Bill James simple formulas predict things that baseball scouts cant predict even after years of experience? In an insightful review of Moneyball, Sunstein and Thaler discuss the clues that Lewis offers. They write:
Why do professional baseball executives, many of whom have spent their lives in the game, make so many colossal mistakes? They are paid well, and they are specialists. They have every incentive to evaluate talent correctly. So why do they blunder? In an intriguing
131

Talent

passage, Lewis offers three clues. First, those who played the game seem to overgeneralize from personal experience: People always thought their own experience was typical when it wasnt. Second, the professionals were unduly affected by how a player had performed most recently, even though recent performance is not always a good guide. Third, people were biased by what they saw, or thought they saw, with their own eyes. This is a real problem, because the human mind plays tricks, and because there is a lot you couldnt see when you watched a baseball game.5

Sunstein and Thaler then point out that Lewis is describing a central finding in cognitive psychology: people tend to use what is known as the availability heuristic when making judgments:
As Daniel Kahneman and Amos Tversky have shown, people often assess the probability of an event by asking whether relevant examples are cognitively available. Thus, people are likely to think that more words, on a random page, end with the letters ing than have n as their next to last lettereven though a moments reflection will show that this could not possibly be the case.6

a false analogy between tossing a coin and the door #1-door #2 decision. As Sunstein and Thaler point out, the problem is not that professionals are foolish or uneducated; it is that they are human. Out of necessity, they rely on fallible intuitions, mental heuristics, and tribal wisdom when processing information to make decisions. The problem, as behavioral economics teaches us, is that such systematic biases in human cognition as anchoring, the availability heuristic, and herd behavior can prevent markets from becoming more efficient. As Sunstein and Thaler write, even when the stakes are high, rational behavior does not always emerge. It takes time and effort to switch from simple intuitions to careful assessments of evidence.7 Viewed in this light, Moneyball therefore constitutes a case study in behavioral economics: despite vast quantities of data available and money at stake, pre-Billy Beane scouts relied on fallible mental heuristics and rules of thumb to make very large decisions. A die-hard believer in efficient markets might bemoan such departures from the theoretical ideal. But a pragmatist can view non-rational and inefficient markets as business opportunities.

Perhaps this is also why so many people get the Monty Hall problem wrong. Its easy to think of cases where complete ignorance means equiprobability: tossing a coin, rolling a die, or spinning a roulette wheel. Many of Monty Halls contestantsand Marilyn vos Savants readerswere perhaps led astray by

From moneyball to workforce intelligence

he story of how Billy Beane used analytics to identify undervalued baseball players has far-reaching implications for many industries. The most obvious parallel is the war for talent. Baseball is not the only domain where

132

The Talent Paradox: A 21st century talent and leadership agenda

the stakes are high when it comes to attracting and retaining talented employees. Consider the following facts: Most companies must devote anywhere between 40 and 70 percent of their operating expenses to compensation, benefits and other employee-related expenses.8 In many domains, a rule of thumb estimate of the cost of replacing an employee is 1.5 times that employees salary. Finally, the business press is replete with warnings that as the population ages, the competition to attract and retain talented workers will intensify. Yet most large organizations still make their hiring decisions using a highly labor-intensive and subjective approach often centering on subjective evaluations of candidates performances at interviews. Potentially useful sources of data are ignored, and the data that are considered are weighed in subjective and inconsistent ways. Therefore, while the market for talent has grown increasingly competitive, it has not necessarily grown more efficient. This creates opportunities for far-sighted organizations similar to the opportunity that Billy Beane saw 10 years ago. Moneyball can be read as an early example of what we call workforce intelligence: the use of analytics to bridge the gap that often exists between workforce-related data sources and the business issues to which they should be applied. For example, predictive models are being built to help HR managers make better hiring decisions. In detail, this involves constructing a database about a companys current and previous employees in which high-performing employees are flagged. A predictive model is then built by optimally combining a set of leading indicatorspredictive variablesof high performance. The model is built and validated on past data, but used to rate the applications of incoming job candidates. In this way, the model serves as a scoring engine used to triage resumes on the fly. HR personnel can then focus on evaluating those candidates that the model identifies as potential top performers. The model doesnt usurp the decision-making process, but can help anchor the decision in a predicatively optimal

It is obvious that living far from the office, frequently working weekends, and working for a problematic or poorly rated manager are all risk factors indicative of a valued employees likelihood to quit. But unlike a human decisionmaker, a predictive model has the ability to optimally combine these and many other factors to efficiently estimate the employees relative likelihood of leaving.
combination of inputs rather than in purely subjective judgments. Similarly, models are being built to predict which employees are most likely to voluntarily resign. For example, it is obvious that living far from the office, frequently working weekends, and working for a problematic or poorly rated manager are all risk factors indicative of a valued employees likelihood to quit. But unlike a human decision-maker, a predictive model has the ability to optimally combine these and many other factors to efficiently estimate the employees relative likelihood of leaving. And unlike the human decisionmaker, the predictive model will arrive at the same answer before and after lunch, takes

133

Talent

virtually no time to draw conclusions, and is not affected by prejudices, pre-conceived ideas or cognitive biases. In short, predictive models can help us better approximate the ideally rational homo economicus. As Billy Beane demonstrated, these tools can transform the process of selecting and managing talent into a key component of an organizations core strategy.

Enter the super crunchers

he strategic potential of workforce intelligence is the most obvious lesson of Moneyball, but the full implications of the book are even broader. In our work as consultants providing services that involve multi-disciplinary data mining and predictive modeling, we have helped decision-makers in their efforts to perform analyses and build predictive algorithms in a wide variety of domains. The parallel of our work to Moneyball has not been lost on us, and we have even recommended the book to many of our HR and non-HR clients. For example, the chief underwriter of a major U.S. insurance company used the Moneyball story to motivate his colleagues to embrace the underwriting predictive model that we were in the process of helping them build. Ian Ayres, a law and economics professor at Yale, picks up on this theme in his recent book Super Crunchers. By discussing applications of predictive analytics in a number of disparate domains, Ayres continues where Lewis, Sunstein and Thaler leave off. Super Crunching is Ayres umbrella term for the various types of data mining, predictive modeling, and econometric, statistical, or actuarial

analyses that can be used to guide human decisions.9 The sheer breadth of the examples Ayres discusses is compelling, and comports well with our own experience applying predictive analytics to a variety of domains. Many of Ayres examples are valuable in that they encourage one to think creatively about new ways in which predictive analytics can be applied. Everyone knows that credit scores outperform loan officers at assessing mortgage default risk. But consider these examples: Ayres colleague, the Princeton economist Orly Ashenfelter, has built regression models that have proven more effective than wine critics at identifying excellent vintages of Bordeaux wine. Neural net models have been built to predict movie box office returns using features of the movies scripts. Karl Rove has repeatedly used consumer segmentation and target marketing techniques to win elections by strategically contacting swing voters. Another compelling example comes from Malcolm Gladwells book Blink. Cook County Hospital has a representation of a decision tree algorithm on a wall of its emergency room. The decision tree is used to triage patients complaining of chest pain based on their likelihood of suffering heart attacks. Despiteor perhaps because ofits simplicity, the decision algorithm outperforms doctors relying solely on their intuitions and professional judgment in the heat of the moment. (Incidentally, the story actually undercuts Gladwells own thesis that highly intuitive snap judgments and thinking without thinking are more reliable than deliberative reasoning.)10

Despite or perhaps because of its simplicity, the decision tree algorithm outperforms doctors relying solely on their intuitions and professional judgment in the heat of the moment.
134

The Talent Paradox: A 21st century talent and leadership agenda

We can add several examples, from our own work, to Ayres list of cases in which analytics are used to make better decisions. Insurance underwriting and pricing: We and our colleagues have helped hundreds of underwriters build multivariate scoring models to better select and price insurance risks. These models find gaps in traditional risk assessment methodologies and thereby provide novel ways for insurers to better distinguish between seemingly similar or identical risks. Unlike the experts versus equations tenor of Moneyball and Super Crunchers, our goal has never been to replace human decision-makers, but rather to help them develop a tool that enables them to make better decisions. Just as analytical methods outperform traditional methods of scouting baseball players, we have seen that underwriters consistently do a better job of selecting risks with predictive models in hand. The implications of these observations have proven very valuable to insurance companies that have adopted analytical methods. Talent management: We have helped employers use psychometric data to better predict employee performance. In one study, we found that employees with certain combinations of behavioral traits had twice the chance of being promoted, whereas employees lacking a different combination of traits had virtually no chance of being promoted. Workforce intelligence findings such as this are useful when making hiring and talent management decisions. Medical malpractice prediction: We have helped physiciansboth general practitioners and specialistsbuild models to better predict whether they are more likely to be sued for malpractice. We have found that, as with the talent management example above, behavioral as well as other factors are predictive. Predictive models using psychometric data could be used to selectively reach out to physicians and ultimately lower the incidence of medical malpractice suits.

Member retention: We have helped hospitals build models to better predict which Medicaid beneficiaries are at highest risk of dis-enrolling from their Medicaid health plan. The resulting scores provided the hospitals outreach personnel with a tool for better focusing their retention efforts.

Consumer business: We have helped companies use analytics to better understand their customers and sales patterns. While it is true that some companies make extensive use of their data to segment, target and cross-sell to their customers, we have found that many others use their data only to generate business metrics and fairly stale management reports. The situation is to a surprising degree similar to what we have found in the emerging field of workforce intelligence: the data exist but are not being used to refine decisions rooted in intuition and mental heuristics. Analytics and predictive models can therefore be brought to bear to exploit the resulting market inefficiencies.

135

Talent

Mortgage triage: We are assisting mortgage lenders to use predictive modeling to better identify potentially troubled loans before borrowers fall behind on their payments or default. In these tumultuous times, traditional reactive and subjective loan management methods are proving unsatisfactory. We are helping to bring predictive analytics to bear for mortgage lenders to design proactive loan and credit-line portfolio management strategies. Loans can be savedand mortgagees can be kept in their

identification of those cases that are likely to become high-severity or long-duration. We have helped companies build models that combine medical, biographic, demographic and psychographic information to better predict which cases are more likely to exceed industry standard norms for severity and duration. With this improved case management tool, workers can be helped to return to work more efficiently and abusers of the system can be more easily identified. Medical insurance customer relationship: We have been working with health insurance contact centers to combine medically based analytics with reengineered business processes to better identify those medical insurance customers who have complex treatment issues and experience difficulty navigating the treatment approval and claims handling process. By segmenting these customers and directing their needs to a specially trained servicing team, outbound calls are being placed to customers to offer upfront assistance and guidance for streamlining their treatment and claims management. This combination of advanced analytics and improved customer experience has resulted in higher levels of customer satisfaction and reduced medical and claims expense. As Ayres points out, the surprising ability of equations to help experts has been the subject of psychological research for over fifty years. The subject originated in 1954 with the publication of the psychologist Paul Meehls book Clinical Versus Statistical Prediction.11 Meehls disturbing little book, as he called it, documented over 20 empirical studies comparing the predictions of human experts with those of simple actuarial models. The types of predictions ranged from how well schizophrenic patients would respond to electroshock to how well prisoners would respond to parole. Meehl concluded that in none of the 20 cases could human experts outperform the actuarial models.12

homesby strategically offering mitigation strategies before borrowers default. Claims and medical case management: Medical case management for workers compensation and disability cases has traditionally been managed primarily as medical events. Thus a case worker helps an injured worker return to his or her job through a prescribed medical treatment process. Rarely has the portfolio of cases been managed analytically with early

136

The Talent Paradox: A 21st century talent and leadership agenda

Behavioral economists such as Richard Thaler and Dan Ariely help us better appreciate the strategic implications for businesses, hospitals, governments, and other organizations. A recipe for success is to use analytics to exploit market inefficiencies resulting from intuitionist decision-making.
Near the end of his life, surveying the field he initiated in the fifties, Meehl wrote:
There is no controversy in social science which shows such a large body of quantitatively diverse studies coming out so uniformly in the same direction as this one. When you are pushing over 100 investigations, predicting everything from the outcome of football games to the diagnosis of liver disease, and when you can hardly come up with half a dozen studies showing even a weak tendency in favor of the clinician, it is time to draw a practical conclusion.13

Ayres quotes two other cognitive psychologists who put the matter even more starkly: Human judges are not merely worse than optimal regression equations; they are worse than almost any regression equation.14 The business implications of this statement are huge. Cognitive scientists such as Meehl, Kahneman, and Tversky help us understand that the increasing ubiquity of predictive analytics is in large measure due to fundamental limitations in human cognition. Thus there is good reason to expect that analytical methods will continue to gain traction in an ever widening field of endeavors. Behavioral economists such as Richard Thaler and Dan Ariely15 help us better appreciate the strategic implications for businesses, hospitals, governments and other organizations. A recipe for success is to use analytics

to exploit market inefficiencies resulting from intuitionist decision-making. The revolution in predictive analytics is already with us; cognitive science teaches us why this is so; and behavioral economics teaches us that we can use this insight to exploit market inefficiencies. Unfortunately, building and executing predictive analytics strategies is not as easy as picking up a $20 bill on a sidewalk. Predictive modeling is a highly complex and multi-disciplinary undertaking. This is a major reason predictive analytics isnt even more ubiquitous than it already is. On the plus side, many opportunities remain.

Synthesizing analytics

redictive analytics is now coming into its own both because of the findings of cognitive science and behavioral economics and also because of a recent and rapid proliferation of huge databases, cheap computing power, and advances in data visualization, applied statistics and machine learning techniques. Any business process that calls on human decision-makers to repeatedly weigh multiple factors to arrive at decisions could more likely than not be improved through predictive analytics. Furthermore, if these decisions are central to a companys core strategy (such as underwriting for an insurance company, or hiring dependably friendly and motivated workers for a restaurant chain) much more is at stake than improvements in
137

Talent

business process efficiencies. Analytics and predictive models can help companies win by exploiting market inefficiencies. But basing competitive strategies on analytics is by no means ubiquitous. We have often been surprised by the modest extent to which analytics is embraced even at prestigious companies. One probable reason: analytics is difficult and often misunderstood. Aside from the obvious entry barrier of mastering advanced super crunching techniques, analytics is multi-disciplinary in ways that are not always made clear in academic or journalistic discussions. Indeed, modeling is not often the dominant phase of an end-to-end predictive modeling project. A full-blown predictive analytics project calls on a broad range of skills that includes business strategy, subject-matter experience and knowledge, project management, knowledge of statistics and machine learning techniques, programming, technological and business implementation, and organizational change management. Furthermore, all of these ingredients must be leavened with the tacit knowledge of experienced predictive modelers who know what complexities to avoid and ways to attack the complexities that remain. Full-blown predictive analytics projects are therefore team efforts that require time, investment, and a multi-disciplinary range of skills. In our experience, this important fact is often overlooked by companies that intend to embark on analytics or predictive modeling projects. Perhaps influenced by breezy journalistic accounts of analytics, managers often underestimate the array of resources and level of investment needed to pull off an end-to-end modeling project. For example, IT managers often think that point-and-click analytics tools can do the job; statisticians often revel in the purely technical aspects of the project, while downplaying other project phases and required skills; actuaries often view modeling projects as pure-play actuarial projects; and business analysts often think that spreadsheet-based analyses suffice.

Executive sponsorship can do an end-run around this blind men encountering the elephant problem by ensuring that appropriate investments are made up front in the multidisciplinary array of skills needed. Finally, enlightened executive sponsorship is also needed to ensure that the fruits of analytics projects are embraced by the larger organization. This can be its own challenge. Some organizations face initial indifference or even hostility to analytics-based strategy. This was certainly the situation Billy Beane faced when he undertook the difficult process of transforming the Oakland As into an analytically oriented team. As Lewis describes, instilling culture change was a majorand difficult part of Beanes job. Other organizations, such as insurance companies or large retailers, will be more naturally inclined to embrace analytics-based strategies. In such organizations, the challenge is to ensure that the ultimate users are engaged in the design and construction of the analytical tools that they must eventually embrace. In either scenario, executive sponsorship is needed to ensure that the analytics project becomes more than a back-office technical exercise. In Competing On Analytics, Thomas Davenport and Jeanne Harris discuss this theme and relate that one well-known CEO kept a sign on his desk quoting Edwards Demings famous aphorism, In God we trust; all others bring data.16 We find it rational to expect that this CEO will find himself in good company in the coming years.

Postscript

till haunted by the Monty Hall problem? Here is a heuristic that might help. First let us clarify the rules of the game: Monty knows which of the doors conceals the car; he must open a door with a goat; and if the car really is behind the door you chose (#1), he will open one of the other two doors (#2 or #3) with equal probability. Clearly at the beginning of the game, it was equally likely that the car was behind doors 1, 2, and 3. In particular, it

138

The Talent Paradox: A 21st century talent and leadership agenda

follows that the probability of the car being behind door #1 was 1/3 and the probability of it being behind either doors #2 or #3 was 2/3. This remains true even after Monty opened door #3 and revealed not the car but a goat. But now the probability that door #3 conceals the car is zero. Therefore all of the 2/3 probability is shifted to door #2. An on-line interactive feature from the New York Times17 enables you to perform a computer simulation yourself. Also, one of Kevin Spaceys MIT students tries to explain the Monty Hall problem in the film 21. But it is unlikely that his explanation would receive full marks at the real-life MIT. Originally published in Deloitte Review #4, 2009 About the authors James Guszcza, PhD, FCAS, MAAA is a senior manager with Deloitte Consulting LLP and the predictive analytics leader of the Advanced Quantitative Solutions service line. John Lucker is a principal with Deloitte Consulting LLP and the co-leader of the Advanced Quantitative Solutions service line (data mining, predictive modeling and advanced analytics related services)

Endnotes
1. John Kay, Financial Times, August 16, 2005 <http://www.johnkay.com/society/401>. 2. Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008) pp. 6-7 3. Michael Lewis, Moneyball: The Art of Winning an Unfair Game (W. W. Norton & Company, 2003) 4. Ibid, p.122 5. Richard H. Thaler and Cass R. Sunstein, Whos on First, The New Republic, September 1, 2003 <http://www.law.uchicago.edu/ news/susntein/2003/moneyball.html>. 6. Ibid 7. Ibid 8. John Houston and Russ Clarke Moving Beyond Data Rich, Knowledge Poor in Human Resources, Deloitte Consulting, 2008. <http:// www.deloitte.com/dtt/cda/doc/content/us_consulting_hc_workforceintelligence_211008.pdf>. 9. Ian Ayres, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart (Bantam Books, 2007), p. 10 10. Malcolm Gladwell, Blink: The Power of Thinking without Thinking (Little Brown and Co, 2005) p. 134 11. Paul Meehl, Clinical Versus Statistical Prediction: A Theoretical Analysis and a Review of the Evidence (University of Minnesota Press, 1954) 12. Michael A. Bishop and J. D. Trout, 50 Years of Successful Predictive Modeling Should be Enough: Lessons for Philosophy of Science, Philosophy of Science 69, September 2002, p. S198 13. Paul Meehl, Causes and Effects of My Disturbing Little Book, Journal of Personality Assessment 50, pp. 370-375 14. Richard Nisbett and Lee Ross, Human Inference: Strategies and Shortcomings of Social Judgment (Prentice-Hall, 1980), p. 141 15. Dan Ariely, Predictably Irrational: The Hidden Forces that Shape Our Decisions (HarperCollins 2008) 16. Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics: The New Science of Winning (Harvard Business School Press, 2006) p.30 17. Interactive feature, The New York Times, April 8, 2008 <http://www.nytimes. com/2008/04/08/science/08monty.html#>.

139

Talent

Beyond the Numbers


Analytics as a strategic capability
By James Guszcza and John lucker > Illustrations by 2face

The central concern of administrative theory is with the boundary between rational and nonrational aspects of human social behavior.

Herbert Simon, Administrative Behavior

uncovering the realities that lie behind the data is what business analytics is all about. Precisely because they are hidden to the casual observer, they lend competitive advantages to the organizations that discover and implement them in business first.

Whats in a name
nalyticS typically involves sifting through mountains of datathat often send confusing or seemingly conflicting signalsin search of nuggets of insight that can be used to make better decisions. Though irksome, initially confusing analytical situations are often the ones that reveal deeper truths, valuable predictive patterns or competitive insights. Perplexity often breeds discovery; surface inconsistency can yield to deeper consistency; and challenge can unseat convention. Uncovering the realities that lie behind the data is what business analytics is all

about. Precisely because they are hidden to the casual observer, they lend competitive advantages to the organizations that discover and implement them in business first. Ironically, something like this very process is needed to make sense of the mountains of literature that have accumulated around the field of business analytics itself. Writings in the business and popular press, blog postings, and conversations with executives reflect many seemingly contradictory ideas. While it is often touted as one of todays most important businessand even cultural trends, analytics has been around in one form or another for many decades and, in a few cases, for well over a century. Depending on whom you speak with, analytics projects are technology projects, actuarial projects, applications of the latest developments in machine learning, exercises in applied statistics and/ or operations research, or nothing more than Business Intelligence (BI) clothed in fresh marketing or journalistic spin. Even the generic nature of the newly fashionable term analytics itself might invite skepticism: After all,

140

141

Talent

techniques that claim to apply to everything often end up solving nothing. Yet there are important messages that should not get lost in the hype. While many subdisciplines and core techniques of analytics are not new, the competitive and operational necessity of analytics is. Hundreds of terabytes of information are now produced each day in forms as diverse as unstructured text, transactional records, Internet clicks, digital multimedia, and RFID and geospatial GPS signals. Analytically adept organizations are able to use all of this data to make refined operational decisions more economically, objectively, consistently and in greater quantities than ever before.1 Organizations not so adept are at risk of drowning in all of this data and falling behind competitively. Todays business landscape has therefore changed in ways that put analytics have-nots at a substantial disadvantage relative to analytics haves. But to form an effective strategy around analytics, it is first necessary to hear beyond the chatter surrounding analytics, develop a clear understanding of what analytics is fundamentally about, and then to structure and prioritize analytics strategies in a way appropriate to ones larger business objectives and competitive situation. The use of information technology to convert raw data into actionable information is an important part of the story. But as we will see, it is only a part: Data and information technology account for only two dimensions of what is ultimately a threedimensional topic. The third and crucially important dimension of analytics is the human and social one.

Price was right

n Competing on Analytics, Tom Davenport and Jeanne Harris help clarify the multifaceted concept of analytics. According to them, analytics is: the extensive use of data, statistical and quantitative analysis, explanatory and predictive models, and fact-based management to drive decisions and actions.2 This definition is excellent. Still, the sudden ubiquity and

seemingly airy generality of analytics might distract from the subjects deep roots and the technical and managerial sophistication needed to master it. Davenport and Harris correctly point out that using data to build statistical models is central to analytics. And indeed one of the earliest instances of business analytics was performed by an important figure in the history of statistics. The 18th-century mathematician and Unitarian minister Richard Price is best known for his early role in promulgating what is today known as Bayesian statistics, the science of using probabilities to quantify uncertain knowledge in the light of data. Less often recognized is the fact that Price applied his quantitative expertise by working as a consultant to the Equitable Life Assurance Society in London.3 By analyzing historical mortality patterns, Price was able to appropriately link the societys insurance premiums to the age of the insured, thereby ensuring that it could adequately meet its future commitments. As a result, the Equitable flourished during the succeeding decades while a string of competitors came and went due to inadequate premium and loss reserves. We are not historians, but Prices work performed a quarter of a millennium ago gets our vote as the first example of business analytics in action. Not coincidentally, it is also an early example of actuarial science. Price trained his nephew William Morgan who went on to become the Equitables actuary and is today regarded as the founding father of the actuarial profession. A similar story comes from Victorian Britain. Charles Babbage is best known as the inventor, along with his associate Lady Lovelace, of the earliest prototype of the modern computer. (Because Babbage and Lovelace predated Edison, their computer was powered by a hand crank.) A man of protean talents, Babbage was also an early pioneer in operations research. By analyzing data, Babbage demonstrated that varying the price of mail delivery by the distance traveled was in fact more expensive than the cost of transporting

142

143

Talent

Information technology is also crucial to analytics ... the best algorithm in the world provides no value sitting on a shelf. It must be implemented.
the mail. The post office acted upon Babbages analysis and became more efficient by charging a flat rate based on weight. The so-called penny post idea was subsequently adopted around the world and persists even today.4 resourceon the predictive insights hidden in the depths of oceans of data. Algorithms and software: Increasingly powerful tools and methods for analyzing data and making predictions are being discovered and promulgated at an unprecedented rate. To take but one example, Thomas Bayes 200-year-old ideas have recently undergone a striking renaissance thanks to clever simulation techniques that have been implemented in open source software packages.7 Indeed one of the premiere statistical computing packages, the open source R package, has experienced its own version of Moores Law: The number of data analysis subpackages contributed to R from scientists and practitioners around the globe has grown exponentially, and many dozens of new routines are added to the R system each year.8 Increased awareness: Farsighted leaders in a variety of domains are increasingly aware of the competitive and operational advantages that analytics can bring. We will say more about this below. Advances in information technology have therefore dramatically magnified both the practical availability and business necessity of data and analytics tools and methods. As a result, novel applications of analytics are taking root at an impressive clip. But it is important to remember that the core ideas and methods of modern analytics are rooted in fundamental statistical and optimization ideas that have been in wide use for decades. Information technology is also crucial to analytics for a second reason: The best algorithm in the world provides no value sitting on a shelf. It must be implemented. A common goal of analytics projects is to create predictive

Moore, Moore, Moore

hile the term analytics is a new entry in the business vernacular, the subject itself is certainly not. So what accounts for its sudden ubiquity? The short answer is information technology. The availability of computing power and data storage capacity have expanded at an exponential pace, and this trend seems unlikely to abate anytime soon.5 Several consequences of Moores Law collectively account for the newfound ubiquity of analytics. Most notably: The data deluge: As noted earlier, we now gather, store and transmit unimaginable quantities of data each day. As Herbert Simon astutely observed nearly 40 years ago, this changes the fundamental economics of business management and decisionmaking. Simon wrote that:
In an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.6

Simons foresight is todays reality: Analytics is increasingly regarded as a necessity to focus decision-makers attentiona scarce

144

The Talent Paradox: A 21st century talent and leadership agenda

models or other types of algorithms intended to improve key business processes and/or help human experts make more effective decisions. In practice this means that once the algorithm has been developed and validated by a team of analysts, it must be implemented in the organizations information systems and used to automatically generate business rules, recommendations or messages tailored to individual cases. Without an effective IT plan in place, the ROI of such an analytics project is likely to be negative. Because of its substantial IT component, people sometimes mistake analytics for a variety of IT or a software implementation project. But this confuses the delivery vehicle with what is being delivered. Predictive models, collaborative filtering algorithms, business process optimizations, pricing solutions and analytically driven collections of business rules are generally not off-the-shelf software products. Rather, they are developed by data scientists with expertise in fields such as statistics, operations research, computer science and machine learning, linguistics, actuarial science, marketing science and psychology. The reason the general term analytics is such helpful shorthand is because of the huge variety of methods and applications that it encompasses. In short, while IT is indispensible to analytics, analytics projects should not be conceived as IT projects.

Human resources: As Michael Lewis recounts in Moneyball, the Oakland As general manager Billy Beane adopted analytical methods to select baseball players who were systematically undervalued by a market for talent dominated by intuitionbased decision-making on the part of seasoned baseball scouts.9 And this story is not unique to professional sports. We have seen firsthand the effectiveness of statistical analysis and predictive modeling in helping guide hiring and talent management decisions in a variety of industries. Medical triage: Cook County Hospital in Chicago, best known as the setting for the television show ER, tested the effectiveness of a three-factor decision tree versus the unaided judgment of its emergency room staff in evaluating which patients were at highest risk of suffering heart attacks. By cutting through cognitive clutter, the decision trees proved effective and have likely saved lives.10 Safety analytics: Not unrelated is the 5 Million Lives campaign, which has sought to use analytics, in the form of evidencebased medicine studies, to identify practices that result in preventable medical harm.11 We have had opportunities to perform analogous safety analytics projects for such diverse clients as a household name retail chain and a prominent hospital group. Our experience comports with published industry reports: Analytics can help identify employees at risk of workplace injury and identify cases in need of prompt remediation. Insurance: In the past decade, insurers have implemented predictive models to help underwriters more accurately underwrite and price complex commercial and
145

A universal acid
ll of this background still doesnt explain one of the most notable aspects of analytics: its impressive range of applicability. In the past decade, analytical methods have been adopted in fields as disparate as consumer business, human resources and talent management, insurance, banking, entertainment, professional sports, medicine, education, telecom, automotive, manufacturing and government. Consider these cases, culled from the popular and academic literature as well as our own project experience.

Talent

professional liability risks. These algorithms identify additional risk criteria that differentiate seemingly identical insurance exposures and allow underwriters to more granularly set prices that offset associated costs and expected risk. Audits and claims management: Statistical fraud detection techniques are effective in prioritizing investigation and audit workflows. Insurance claim triage is a similar application. In both cases, analytic methods outperform humans ability to spot and act upon outliers and suspicious patterns. Case management: Case management problems arise in a very broad array of business situations and are classic predictive modeling applications. Among the many dozens of applications include identifying Medicaid members likely to attrite from insurance plans, identifying high school students at highest risk of dropping out, predicting which college applicants will accept offers of admission, identifying people in need of healthier lifestyles, and identifying noncustodial parents at highest risk of lapsing on their child support payments. This list could easily go on for pages.12 But the diversity represented even in this short list should be enough to drive home the point that analytics is the ultimate transferable skill. In a striking array of domains, intelligent applications of analytics have provided organizations with enormous opportunities for efficiency gains, rationalized operational decision-making processes, expense containment and profitable growth. Borrowing an image from philosopher Daniel Dennett, analytics can usefully be thought of as a sort of universal acid in that it has the potential to eat through a virtually unlimited variety of decision and operational problems.13

This is because analytics is the science of better decision-making; and decision-making is the heart of business.14

Analytics with a human face


lbert Einstein famously wrote that the whole of science is a refinement of everyday thinking.15 This insight contains the key to understanding the broad applicability of analytics and is an excellent thought for leaders to keep in mind as they guide their organizations in cultivating analytic competencies. To paraphrase Einstein, analytic initiatives are systemic refinements of an organizations core operational decision-making processes. To illustrate, consider the case of a human resources manager who is faced with the task of making offers to a small subset of a large group of applicants. Perhaps they are recent graduates applying for internships at a bank or applicants for flight attendant positions with an airline. How does the hiring manager go about choosing? In essence he combines the available information (from sources like resumes, interviews, references and perhaps even external sources like professional networking Web sites) about each candidate in a way that enables him to compare each candidates likely success on the job. How does the HR manager decide which factors to consider and how to combine them? Ideally, he generalizes from his prior experience as well as that of his colleagues and mentors. These professionals have perhaps made hundreds of hiring decisions and, ideally, know which factors are more or less important and by how much. Put another way, they generalize from examples: They use inductive reasoning. Predictive modeling is a refinement of the very human process of inductive reasoning. It is not necessary for business leaders to understand the finer points of multivariate regression, classification and regression trees, artificial neural networks or support vector machines. It is important for them to understand that these are all tools that learn from large databases of cases to arrive at general

146

The Talent Paradox: A 21st century talent and leadership agenda

conclusionsin an analogous way that the HR manager in our story learned from his and his colleagues experience. Our story could easily be retold, changing the protagonist to a marketing professional, an insurance claims adjuster, a fraud investigator, an emergency room doctor, a movie studio executive selecting scripts, a psychologist, a social services case manager, a retail store executive or a university admissions officer going about their daily decision-making business. When such professionals use prior experience to arrive at decisions, they informally build predictive models in their heads. Analytics uses large databases containing both traditional and novel sources of information to formalize, improve and scale up this process. Business analytics is therefore widely applicable for precisely the same reason that everyday inductive reasoning is widely applicable. The former is a scientific refinement of the latter.

All too human

o far we have discussed predictive modeling in relation to Herbert Simons picture of a business decision-maker who makes satisficing rather than optimal decisions due to his or her bounded rationality. Simon pointed out that real-life decision-makers are not the idealized rational calculatorshomo economicus from classical economics.16 Predictive models, operations research solutions and analytically motivated business rules are therefore needed to serve as decision-making prostheses. Just as eyeglasses help correct myopia, predictive models can help correct bounded cognition. But it turns out that actual decision-makers fall short of even Simons more realistic picture of satisficers making complex decisions in uncertain environments. In their recent book Nudge, the behavioral economists Richard Thaler and Cass Sunstein likened homo economicus to Mr. Spock from Star Trek. According to Thaler and Sunstein, not only do real-life decision-makers fall short of this ideal, they in fact have more in common with the cartoon everyman, Homer Simpson!17 Thaler,

the Nobel laureate Daniel Kahneman and the late Amos Tversky are considered the founding figures of behavioral economics, a discipline that describes how human decision-makers predictably deviate from the rational ideal. Dozens of surprising, yet utterly predictable, decision-making biases have been discovered. For example, the anchoring phenomenon teaches us that peoples estimates of an unknown quantity can be affected in often comical ways by arbitrary reference points. For example, if a group of people are first asked to add 200 to the last three digits of their phone numbers and then asked when Attila the Hun invaded Europe, their answers are correlated with their phone numbers.18 Loss aversion is the well documented fact that the pleasure of gaining an item is less intense than the pain of giving it up. In Predictably Irrational, Dan Ariely illustrated this by studying a group of basketball fans who had won tickets to a Duke Blue Devils game in a random lottery. Ariely found that the winners were willing to part with their tickets for an average of $2,400, while the losers were willing to pay only $175 on average. Not a single ticket changed hands.19 Many such cognitive biases have been repeatedly demonstrated in easily replicated experiments. The fact that human cognition is not merely bounded but predictably biased has an important strategic implication: Humans predictable cognitive biases result in inefficient markets. Decision-making anchored in the analysis of data rather than (biased) intuitions can therefore be used to profit from such markets. Thaler and Sunstein make this point in a discussion of Moneyball:
Why do professional baseball executives, many of whom have spent their lives in the game, make so many colossal mistakes? They are paid well, and they are specialists. They have every incentive to evaluate talent correctly. So why do they blunder? In an intriguing passage, Lewis offers three clues. First, those who played the game seem to overgeneralize from personal experience: People always thought their own
147

Talent

experience was typical when it wasnt. Second, the professionals were unduly affected by how a player had performed most recently, even though recent performance is not always a good guide. Third, people were biased by what they saw, or thought they saw, with their own eyes. This is a real problem, because the human mind plays tricks, and because there is a lot you couldnt see when you watched a baseball game.20

Sunstein and Thaler point out that the phenomena Lewis describes are not unique to the culture of baseball scouts; indeed they are central to behavioral economics. Sunstein and Thaler connect Lewis discussion to another central finding of behavioral economics: the availability heuristic.
As Daniel Kahneman and Amos Tversky have shown, people often assess the probability of an event by asking whether relevant examples are cognitively available. Thus, people are likely to think that more words, on a random page, end with the letters ing than have n as their next to last lettereven though a moments reflection will show that this could not possibly be the case.21

Sunstein and Thaler comment, Even when the stakes are high, rational behavior does not always emerge. It takes time and effort to switch from simple intuitions to careful assessments of evidence.22 Switching from simple intuitions to careful assessments of evidence is not a bad working definition of business analytics. With its fundamental postulate of the perfectly rational homo economicus, classical economics has long abetted the belief that real-life markets are efficient. The recent discoveries of scientists like Simon, Kahneman, Tversky and Thaler teach us that it aint necessarily so. The implication is that those organizations early to adopt predictive analytics can profit from market inefficiencies resulting from traditional decision-making practices that are infused with cognitive biases.

Analytics as strategy

Sunstein and Thalers point is not that professionals are foolish or uneducated; it is simply that they are human. Of necessity, they rely on fallible intuitions, mental heuristics and tribal wisdom when processing information to make decisions. The problem is that cognitive biases such as anchoring, the availability heuristic, loss aversion and herd behavior can prevent markets from becoming efficient.

here is therefore more to analytics than software, data and models. Successful analytics projects do not begin with data and end with models; rather, they begin with strategy and end with models and analytic insights driving improved operational decision-making and business processes. The implication is that analytics projects require strong executive leadership along a number of avenues. In particular: Clarity of strategic vision: Executive leadership is needed to articulate which applications of analyticspursued in which orderwill provide the greatest benefit to the organization. It is therefore important

Sunstein and Thalers point is not that professionals are foolish or uneducated; it is simply that they are human. Of necessity, they rely on fallible intuitions, mental heuristics and tribal wisdom when processing information to make decisions.
148

The Talent Paradox: A 21st century talent and leadership agenda

to consider how to measure the ROI of an analytics project. Measuring the segmentation power of predictive models on holdout data is often a useful input in this process. Information capital: Good data is an obvious prerequisite for analytics projects. Data is indeed an asset, but it can provide value only if it has been properly organized, cleansed and documented in a way that is suitable for analysis. This requires investing in data warehouse technology and sophisticated data analysis software. Furthermore, an IT implementation plan should be crafted in parallel with the design of each analytics solution. Waiting until after the analytical phase has been completed to begin the process of IT implementation planning can be a recipe for cost overruns or worse. Human capital: Viewing analytics as a type of technical, software or BI project would be like buying building tools and materials and expecting a fine house to result without the services of an architect or master builder. Textbook knowledge of IT, programming and statistical theory are all prerequisites. But the abilities to insightfully create predictive variables, explore and visualize high-dimensional datasets, and reflect domain knowledge into the design of a predictive model are all examples of tacit knowledge: They can only be learned by doing. Such skills must be cultivated within the organization, perhaps in the form of an analytics center of excellence, or else sought externally. Social capital: Resistance to change is part of human nature. Therefore, especially for organizations steeped in traditions of intuition-based decision-making, a significant commitment to training, culture change and even simple persuasion is required. Echoing Sunstein and Thaler, it takes time and effortin the form of executive sponsorshipto switch from a culture of intuition-based to evidence-based decisionmaking. A related point is that analytics is

highly multidisciplinary. Executive-level sponsorship can help ensure that the different business units and stakeholders work together in harmony. The most effective analytics project managers are at ease speaking with people in multiple domains, functioning as translators and interpreters. Finally, seasoned domain expertsinsurance underwriters, social service case workers, marketing specialists, fraud investigators and so onwill ideally be recruited to collaborate with statistical experts and project managers in the design and day-to-day execution of the analytics project. Doing so helps ensure that their domain and institutional knowledge is reflected in the resulting analytical databases and predictive models. Also, it goes a long way toward promoting the acceptance of evidence-based decision-making within the organization.23 Because of its inherently technical nature, it is easy to underestimate the importance of the human and social dimensions of analytics. But recall that the true drama of Moneyball centered around culture change. The most challenging part of Billy Beanes job was not hiring Paul DePodesta or overseeing his data analysis; it was convincing his recalcitrant scouts to trust DePodestas analysis rather than their unaided intuitions about which players to recruit. Two other principles of behavioral economics are relevant in this connection: Status quo bias (the tendency to stick with the current situation even when better ones are available) and optimism bias (the tendency to be overly optimistic about ones own abilities and the outcomes of ones actions). Such cognitive

149

Talent

biasestogether with garden-variety turf wars and organizational politicsare major reasons why organizations traditional, intuitive decision-making cultures often resist analytics initiatives. Executives should not let their own optimism bias lead them to underestimate such risks. Generally speaking, a vigorous organizational acceptance of analytics does not just happen. Well-conceived strategies must be properly communicated, incentivized and executed in order for cultures of evidencebased decision-making to take root.

We are all actuaries now


S computing power and data sets have increased exponentially, so has the embrace of analytic methods in business, government, medicine, education, entertainment and beyond. The revolution is here, and it has been a long time coming. As discussed above, analytics first took root in the insurance industry for a very good reason. Insurance is the rare business in which the producer does not know the cost of production at the time of sale. Two seemingly identical risks can in fact present the insurer with much different risks. Without actuarial science and advanced analytics, insurers can easily fall prey to adverse selection resulting from the information asymmetry of policyholders and competitors possessing a superior understanding of the drivers of insurance claims. Two centuries after Richard Price consulted for the Equitable, the world is a different place. The business landscape is rapidly changing thanks to big computing, big data and correspondingly robust machine learning and optimization techniques. Forward-thinking organizations that are the first to embrace analytics can change the competitive dynamic by executing their core competencies and strategies better than their competitors.

What is an opportunity for analytically sophisticated organizations is simultaneously a threat to their competitors. The nature of insurance is such that analytically impaired insurance companies are not long for this world: Analytically sophisticated competitors will use their deeper understanding of risk factors to skim the cream and select against them. Progressive Insurances use of personal credit scores to more accurately price auto insurance is a recent chapter in this decadesold story.24 Stories such as Billy Beane exploiting an inefficient market for talent and Netflix using analytics to challenge traditional retail business models illustrate that this data-driven phenomenon is no longer specific to insurance. Because data is now everywhere, so is analytics. This fundamentally changes the competitive landscape in a way that makes analytics central to competitive strategy. One, therefore, does not need a predictive model to foresee that ever more organizations in ever more sectors will realize that analytics must be as essential to their core operations as it has always been to insurers. Paraphrasing Milton Friedman speaking in a much different context, we are all actuaries now. Originally published in Deloitte Review #8, 2011 About the authors James Guszcza is a senior manager with Deloitte Consulting LLP and the national predictive analytics lead for its Advanced Analytics & Modeling practice. John Lucker is a principal with Deloitte Consulting LLP and the leader of its Advanced Analytics & Modeling practice. He is also the Advanced Analytics & Modeling Global Human Capital Leader for Deloitte Touche Tohmatsu Limited.

150

The Talent Paradox: A 21st century talent and leadership agenda

Endnotes
1. Data, Data Everywhere, The Economist, February 27, 2010. 2. Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics: The New Science of Winning (Harvard Business School Press, 2006), page 7. 3. Ian Hacking, The Taming of Chance, Cambridge University Press, 1990, page 49. 4. George Dyson, Darwin Among the Machines: the Evolution of Global Intelligence, Basic Books, 1998, page 42. 5. New York Times, August 30, 2010 Advances Offer Path to Further Shrink Computer Chips, http://www.nytimes. com/2010/08/31/science/31compute.html. 6. Simon, H. A. (1971), Designing Organizations for an Information-Rich World, in Martin Greenberger, Computers, Communication, and the Public Interest, Baltimore, MD: The Johns Hopkins Press, page 40-41. 7. The technique is Markov Chain Monte Carlo (MCMC), which was first developed at Los Alamos to solve high-dimensional integration problems. The Bayesian renaissance was sparked in 1990 by the publication of Sampling-based approaches to calculating marginal densities by Alan Gelfand and Adrian Smith in the Journal of the American Statistical Association. Before Gelfand and Smiths application of MCMC, Bayesian methods were practical only for simplified problems. http://home.gwu. edu/~stroud/classics/GelfandSmith90.pdf. 8. Editorial, R News, Volume 8/2, October 2008. http://www.r-project.org/ doc/Rnews/Rnews_2008-2.pdf. 9. Michael Lewis, Moneyball: the Art of Winning an Unfair Game (W. W. Norton & Company, 2003). 10. Malcolm Gladwell, Blink: The Power of Thinking without Thinking (Little Brown and Co, 2005) p. 134. 11. See http://www.ihi.org/IHI/ Programs/Campaign/. 12. The University of Minnesota psychologist Paul Meehl was a pioneering figure in the academic study of what has come to be called actuarial versus clinical prediction. Towards the end of his career, Meehl commented, There is no controversy in social science which shows such

a large body of quantitatively diverse studies coming out so uniformly in the same direction as this one. When you are pushing over 100 investigations, predicting everything from the outcome of football games to the diagnosis of liver disease, and when you can hardly come up with half a dozen studies showing even a weak tendency in favor of the clinician, it is time to draw a practical conclusion. Causes and Effects of My Disturbing Little Book, Journal of Personality Assessment 50, pp. 370-375. 13. Daniel Dennett, Darwins Dangerous Idea: Evolution and the Meanings of Life, Simon & Schuster, 1995. 14. Herbert Simon, Administrative Behavior: A Study of Decision-Making Behavior in Administrative Organizations (4th ed), page xi: Decision-making is at the heart of administration. 15. Albert Einstein (1936), Physics and Reality. http://www.kostic.niu.edu/Physics_and_Reality-Albert_Einstein.pdf 16. Herbert Simon, Administrative Behavior: A Study of Decision-Making Behavior in Administrative Organizations (4th ed), page 118: Administrative theory is peculiarly the theory of intended and bounded rationality of the behavior of human beings who satisfice because they have not the wits to maximize. 17. Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008) page 22. 18. Ibid, page 23. 19. Dan Ariely, Predictably Irrational: The Hidden Forces that Shape Our Decisions (HarperCollins 2008), Chapter 7. 20. Richard H. Thaler and Cass R. Sunstein, Whos on First, The New Republic, September 1, 2003. http://www.law.uchicago. edu/news/susntein/2003/moneyball.html. 21. Ibid. 22. Ibid. 23. In Pricing as a Strategic Capability, Shantanu Dutta, Mark Bergen, Daniel Levy, Mark Ritson, and Mark Zbaracki similarly discuss the need to invest in three types of capital: Human Capital, Systems Capital, and Social Capital. MIT Sloan Management Review, Spring 2002. 24. See Competing on Analytics by Davenport and Harris, page 26.

151

The Talent Paradox: A 21st century talent and leadership agenda

A Delicate Balance
Organizational barriers to evidence-based management
By James Guszcza and John lucker > Illustrations by Anthony Freda

The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.

leo Tolstoy

Future Present

ver a hundred years ago, H. G. Wells stated that statistical thinking would one day be as necessary for efficient citizenship as the ability to read and write.1 Wells prescient comment is equally true of management and organizational behavior in the age of big data and business analytics. In domains as varied as professional sports, medicine, consumer business, financial services and government operations, a consensus has rapidly developed

about the power of statistical thinking to help experts make better decisions and businesses improve their operations. And a stream of best-selling books, movies and podcasts on the topic has piqued societal awareness of analytics as a catalyst for fresh thinking and change.2 However, in our many years as consultants, we have found that the realized benefits of business analytics are unevenly distributed across domains, and even among different organizations within the same domains. One might chalk this up to the fact that intelligently
153

Talent

working with data and doing statistical analysis is hard work, involving specialist skills. Fair enough. But this turns out to be only part of the problem. Generally speaking, data analysis is only part of an analytics project; and ironically it often isnt the hardest part. It is not uncommon for sophisticated technical work to end up on the cutting room floorresulting in unrealized valuefor reasons having more to do with human and organizational behavior than the finer points of data quality or statistical methodology.

In previous articles, we have discussed the ways in which business analytics is more than a story about arcane statistical algorithms, big data management and information technology.3 Certainly the newfound prominence of business analytics owes much to Moores Law and its corollaries. But business analytics is not ultimately about technology and technique any more than architecture is about blueprints and drafting tools. Well-conceived analytics projects are directed at the central problems
154

and processes in the domain at hand. For example, in medicine this might mean making more reliable diagnoses and triage decisions. In insurance this might mean making better underwriting, pricing or claim settlement decisions. In a human resources context this might mean making better hiring and talent management decisions. A common challenge in such applications is achieving a realistic compromise between a current-state business or decision process and an envisioned ideal that could in theory be achieved with perfect data and the best available analytics. We have encountered many organizations that, often out of a combination of inertia, competing priorities and culture of skepticism about the effectiveness of business analytics, spend years deliberating before taking the first step toward embracing analytical methods. Others eagerly embrace the notion of analytics but treat it as an all-or-nothing proposition requiring data or algorithmic perfection before actions can be taken. Some organizations swing from one extreme to the other. Of course the preferred point is somewhere between these extremes: in many business settings, analytics is best viewed as an iterative process of continued improvements and datadriven refinements of core business operations. In such settings, either extreme skepticism leading to inaction or extreme aspiration leading to analysis paralysis is suboptimal. Such extreme attitudes and approaches are often borne both of sketchy notions of how analytics works and poor communication between the technical people who analyze data and the decision-makers for whom the fruits of their efforts are intended. The legendary statistician John Tukey memorably characterized large-scale data analysis as the collision between statistics and computing. Similarly, if not properly planned and managed, business analytics projects can feel like a collision between data analysis and business decision making. If they are to enjoy the benefits of analytical methods, organizations should strive to avoid collisions

The Talent Paradox: A 21st century talent and leadership agenda

and promote evolutions, syntheses and collaborations among people with differing skills and perspectives. To that end we humbly offer a taxonomy based on our observations in the fieldof what can go wrong. A connecting theme of our observations is that analytics projects are often stymied because of failures to appreciate that both data-driven analytics and expert decision making have strengths as well as limitations and that the strengths and limitations of each much be counterbalanced with those of the other. The image of data mining should give way to the image of data dialogues.

A Middle Path
n intriguing aspect of business analytics is its near-universal applicability, yet this also accounts for why it can be such a slippery topic to discuss. Analytics projects take on vastly different aspects in different contexts. For example, the authors have built credit-scoring models using tens of millions of data points as well as analyzed human resources databases containing mere hundreds of data points. Size matters, but its not decisive. Similar comments can be made about data quality and completeness, the relative appropriateness of supervised versus unsupervised learning techniques, the relative appropriateness of experimental versus observational data, appropriate validation methodologies and so on.4 Such considerations are context-dependent and can vary in veracity and business significance in real-world settings. To bring order to the kaleidoscopicand ever expandingvariety of applications and methodologies, a classification scheme might be helpful. One way to classify analytics projects is by the degree to which decision making can be outsourced to computer algorithms. Some of the more prominent examples of business analytics hinge on computer algorithms that serve as decision-making robots whose day-to-day functioning involves a minimum of human intervention. Think of Netflix using

A connecting theme of our observations is that analytics projects are often stymied because of failures to appreciate that both data-driven analytics and expert decision making have strengths as well as limitations and that the strengths and limitations of each much be counterbalanced with those of the other.
collaborative filtering algorithms to suggest new titles based on a customers viewing history.5 In each case an algorithmic, data-driven approach both refines and scales up a traditional mode of doing business: Savvy booksellers and video store clerks can be very adept at recommending books and movies to their loyal customers. But even Quentin Tarantino in his video store heyday could not make movie recommendations on the scale of Netflixs recommendation engines. At the other extreme, consider an executive at a global reinsurance company recommending how much capital to set aside in reserves as a cushion for adverse events. Any such manager worth her salt will make the decision in the light of highly sophisticated analyses of past loss trends, correlations among the risks in a portfolio, and stochastic simulations of future economic conditions and other macro factors. But the decision remains solidly with the executive and is unlikely to be left up to the indications of a purely automated algorithm.

155

Talent

The term business analytics is broad enough to apply equally well to each of these extreme instances. In each case, data analysis is used to guide a business decision, and the result is decisions that areon average and in the long run (think the Law of Large Numbers)better than those that would result from unaided judgment. In the book and movie examples, the machine learning algorithms and induction rules simply replace human decision-makers (the store clerks); in the reinsurance example, the analytical results serve as inputs to a decision that remains fully under the purview of a human decision-maker. Our focus in this article is the broad swath of analytics applications falling at various points on the spectrum bounded by these two extremes. It is in this middle realm that the success of business analytics can be most surprising and sometimes downright counterintuitive.6 Medical decision making offers a good paradigm example. Here, highly trained professionalsmedical doctorsregularly make decisions under uncertainty. Which of two patients arriving in full crisis at the emergency room complaining of chest pains should be admitted first? Given a positive outcome of an imperfect test, should a patient be treated for a rare disease? Should a risky operation be recommended to a patient? It is hard to imagine such decisions being turned over to a purely algorithmic process similar to the ones used to recommend movies or make targeted marketing decisions. The stakes are too high and the

evidence too subtle and complex to turn over to a purely automated decision process. Yet one could also argue that, precisely because the stakes are so high and the evidence so subtle and complex, the opposite strategy of entrusting medical decision making to the unchecked professional judgment of doctors is similarly suboptimal. In Blink, Malcolm Gladwell provides a memorable example that illustrates the point.7 Gladwells anecdote begins in the late 1990s at the resource-strapped Cook County Hospital emergency room. (As it happens this was the very emergency room that inspired the television show E.R.) Brendan Reilly, the chairman of the hospitals Department of Medicine faced 250,000 patients visiting the Emergency Department (ED) each year. An average of 30 arriving patients per day complained of chest pains and worried they were having heart attacks. This presented ED physicians with the formidable problem of rapidly deciding which patients to send to intensive care, which to send to intermediate care, and which to send home. In a controlled experiment, Reilly found that a computer-driven decision-rule protocol was markedly more accurate than the unaided judgment of physicians. In a JAMA article summarizing his work, Reilly reported that 84 percent of the physicians he surveyed believed that the decision-rule approach improved patient care.8 Reilly himself concluded that the analytics-driven rules approach improved efficacy without compromising patient safety.

156

The Talent Paradox: A 21st century talent and leadership agenda

More generally, there is now considerable evidence that Computerized Decision Support Systems (CDSS) can improve both practitioner performance and patient outcomes.9, 10 And Atul Gawande has written eloquently about the power of simple checklistswhich in other domains would be called business rulesto improve the delivery of medical care.11 In a New York Times op-ed, none other than Billy Beane joined the chorus of medical, political and business leaders who prescribe a datadriven, evidence-based approach to medical care analogous to the evidence-based methods he famously used to bring the Oakland As up in the ranks.12, 13 Obviously none of this work suggests that physicians could or should be replaced with purely automated decision protocols. What it does suggest is that purely clinical decision makingone extreme end of our spectrumis likely a sub-optimal model for much medical decision making. In many situations, physicians make better decisions armed with datadriven predictive models, decisionrule sets and checklists than they do relying on unaided professional judgment. What can be applied to medical decision making can also be applied to decision problems in domains as diverse as human resources and talent management (Moneyball has become a classic example), risk management, insurance and loan underwriting, fraud detection, caseworker deployment, retail pricing and understanding the organizational drivers of employee resignations. In each of these domainsand many othersevidence-based methods have been shown to outperform the unaided judgment of trained professionals.14 We believe that, as with medical decision making, the rise of data-driven decision making does not presage the end of professional judgment in any of these fields. There will always be a need for HR managers and talent scouts to make hiring decisions; risk and insurance professionals to make risk management, underwriting and investment decisions; and caseworkers in government, business, and

education to make various decisions serving citizens, customers, employees and students. While the march of business analytics will not replace professional judgment, it can continually transform, enhance and refocus professional judgment. This is a major reason it would be a mistake to view business analytics as a technical domain beginning with data analysis and ending with computer algorithm implementation. Professional judgment enters this process at two crucial points. First, professional judgment and domain knowledge should be used to frame, prioritize and inform specific steps in the process of analyzing data to build predictive models or craft rule sets and checklists. Second, no predictive model or decision rule is complete or infallible: Human judgment is needed to decide when to use, temper or simply ignore model indications. There is no simple recipe for doing this. The process is typically a pragmatic blend of art, science and case-specific business strategy. In short, both analytical methods and the traditional decision processes they are intended to improve have strengths and weaknesses that should be pragmatically counterbalanced.15

Angels And Demons

Scott Fitzgerald famously wrote that the test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and retain the ability to function. A similar comment applies to an organizations ability to execute on analytics. A prerequisite for achieving organizational buy-in of analytics is understanding, forming a strategy around, and communicating the required interplay between analytical methods and the best available domain knowledge and judgment. The biggest challenges of executing on analytics are often found where algorithmic indications should be integrated with human professional judgment. Because of the range of personnel involved, this is an inherently organizational issue. Unsurprisingly, challenges often arise from such sources as office politics, inertia, principal/agent issues and
157

Talent

organizational dynamics. Such generic project implementation issues often take on added force because business analytics may often be poorly or inconsistently understood by the various stakeholders within the organization. As a result, one often encounters extreme or overly simplistic attitudes about predictive analytics. At one end of the continuum is the sort of extreme skepticism and hostility to analytical methods dramatized in such books as Moneyball and Super Crunchers.16 At the other, models are tacitly regarded as repositories of truth rather than provisional, imperfect decision aids that should be continually monitored and subjected to critical thinking. Models are either demons or angels. We believe that such extreme conceptions are at the root of many of the organizational biases that we have observed over the years.

decisions in the face of uncertainty. Business analytics is therefore as much about human psychology as it is about data and algorithms. As an example, take a moment to form a mental image about Linda. Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Now that youve formed your mental image, rank these three scenarios in order of likelihood: Linda is active in the feminist movement. Linda is a bank teller. Linda is a bank teller and is active in the feminist movement. The pioneering psychologists Daniel Kahneman and Amos Tversky posed precisely this question to groups of students at several major universities. Kahneman discusses this experiment in Thinking, Fast and Slow.19 Not surprisingly, most of the students felt that being active in the feminist movement was the most likely scenario given what we know of Linda. But at each university, between 85 percent and 90 percent of them also felt that being a bank teller was the least likely of the three scenarios. In other words, they judged that Lindas being a feminist bank teller is more likely than Lindas being a bank teller. But a moments reflection reveals that this cannot possibly be the case: Feminist bank tellers are a subset of all bank tellers! The probability of being a feminist bank teller must therefore be lower than the probability of being a bank teller. In this example, our intuitions can lead us badly astray in a way that is as surprising as it is straightforward. Kahneman attributes phenomena such as the Linda story to a certain type of mental process that he called Type 1. Type 1 mental processes are fairly automatic, effortless and place a premium on associative coherence. In contrast, Type 2 mental processes are controlled, effortful and place a premium on logical coherence. Although we fancy ourselves primarily Type 2 creatures, many of

Point: Equations Trump Experts


We tell ourselves stories in order to live.

Joan Didion

uSineSS analytics is typically viewed as a techy or geeky subject because of its statistics and machine learning subject matter as well as the need for such IT-heavy contributions as data warehousing, systems implementation and dashboard reporting. We tend to regard business analytics in the context of what economists call human capital. After all, decision making and decision makers a.k.a. peopleare central to all enterprises, and decades of academic research and business experience suggest that data-driven methods can help even highly trained domain experts make better decisions.17, 18 This is not just because our databases are now so deep and rich or that we now possess powerful analytical tools and techniques. It is also because we human beings are so surprisingly bad at weighing evidence, juggling probabilities and making consistent, coherent

158

The Talent Paradox: A 21st century talent and leadership agenda

our mental operations are Type 1 in nature. Andheres the rubType 1 mental processes are very poor at statistical reasoning.20 This is a majorand, in business, too often neglected reason why analytical methods are taking root in broad swaths of business, government and medicine. Models can serve as correctives for the bounded rationality and biased cognition of human decision-makers. Ironically, the dominance of Type 1 thinking can also lead to the organizational resistance to the very analytics initiatives that can help organizations become more Type 2 in nature. A major culprit is the so-called overconfidence bias. So far are we from being naturally statistical thinkers and rational decision-makers that Kahneman characterizes the mind as a machine for jumping to conclusions. He comments that neither the quantity nor the quality of evidence counts for much in subjective confidence. The confidence that individuals have in their beliefs depends mostly on the quality of the story that they can tell about what they see, even if they see little. (Italics added.) This is why human experts confidence in their own judgments systematically exceeds those judgments accuracy. Kahneman calls this phenomenon the illusion of validity. It is no wonder that the corrective power of predictive models is so counterintuitive to people making decisions in the field. This helps explain a phenomenon we have long noticed in our consulting work: Often

So far are we from being naturally statistical thinkers and rational decision-makers that Kahneman characterizes the mind as a machine for jumping to conclusions. He comments that neither the quantity nor the quality of evidence counts for much in subjective confidence.

it is senior leaders and decision-makers who are skeptical about the economic value of predictive models. In light of Kahnemans observations, this makes sense. After all, such individuals have had the longest time to form an associatively coherent body of narratives pertaining to their domains: which draftees will make the best baseball player; which student to admit; which intern to hire; which insurance risks will profit the company; which medical protocols can be cut short. Perhaps their eminence has resulted, in part, from their skill at weaving convincing narratives that impress their colleagues. Their seniority lends them an air of authority, and indeed part of their success might be attributable to their charisma and ability to convince their colleagues with their narrative accounts.21 Unfortunately, given the authority that such individuals enjoy within their organizations, their resistance can seriously hinder the progress of analytics projects. We have witnessed situations in which a few well-positioned skeptics have wielded disproportionate influence over the fate of predictive modeling projects. Consistent with Kahnemans discussion, such people tend to disbelieve models and be most confident in the accuracy of their own judgments. In conversation and in meetings, they often emphasize a relatively small number of instances where a model makes counterintuitive predictions, and deemphasize the unproblematic majority
159

Talent

of instances. We have seen convincing antimodeling narratives wrapped around memorable cases where a model appears to make a novice error that no competent human expert would ever make. The appropriate response is to analyze such cases with the perspective that (a) models combine the information that they are presented with and (b) no model is perfect, and analyzing anomalies and outliers is a standard way to improve a model. In analytically minded organizations, this is the natural response. But in cultures where anti-model skepticism dominates, such narratives can take on a life of their own.22 Another key finding of behavioral economics is the surprising prevalence of the so-called availability heuristic: Ones estimate of an events likelihood is affected by how easily it comes to mind. For example, people fear perishing in an airplane accident more than perishing in an auto accident even though the former is actuarially less likely; in academic studies, people have been willing to pay more for terrorism insurance than insurance that covers multiple perils including terrorism; and people tend to estimate that words ending in ing are more frequent than words whose penultimate letter is n. We have seen examples of apparent model failure lead to conclusions that the model in question is not to be trusted. In these situations, offering statistical evidence of high model accuracy and segmentation power on out-of-sample validation data is only weakly effective against such cognitively available stories. The irony is amusing and frustrating in equal measures: The very types of cognitive biases that the model is intended to ameliorate are themselves responsible for institutional organ rejection of the model. Such problems are cultural rather than technical in nature and therefore do not lend themselves to easy answers. Achieving proper communication, unbiased assessments and organizational buy-in are often no less challenging than achieving technical excellence.

COUNTERPOINT: ALL MODELS ARE WRONG


Any sufficiently advanced technology is indistinguishable from magic.

Arthur C. Clarke

e have just discussed an organizational bias that might be called model accuracy neglectthe tendency to overestimate the accuracy of ones own judgments and regard predictive models with undue skepticism. It is also worthwhile to explore a set of organizational biases that tends to the opposite direction: undue deference to analytical techniques and practitioners, and lack of critical thinking in model design and execution. George Box, one of the worlds preeminent statisticians, is widely known outside the statistical community for his aphorism, all models are wrong, but some are useful.23 It is a sign of the times that one now hears academic statisticians regularly quoted at business conferences and in the popular press. Boxs motto expresses a subtle idea in a mere eight words. But perhaps this idea is too subtle. For Boxs message is often distorted (as in its not too bad to bend the rules) in ways that lead to this second type of organizational bias. Two themes are important. First, it is important not to lose sight of the practical context of modeling projects: The goal is not absolute truth of the sort sought in fields like mathematics and physics. Rather, it is improved decisions. Second, it is important to have a realistic conception of what models can and cannot do. At the opposite end of the spectrum from model accuracy neglect lies another type of organizational bias that might be called magical thinking about analytics. Business analytics practitioners are often motivated by the sheer pleasure of using mathematics and scientific reasoning to arrive at useful facts and insights. The authors remember hearing about a prominent executive of

160

The Talent Paradox: A 21st century talent and leadership agenda

a major insurance companyan actuary by trainingwho was spotted reading one of Einsteins original essays on relativity theory while traveling on the corporate jet. The scientific motivation is both admirable and valuable and should be encouraged by organizations wishing to become more analytically oriented. At the same time it is important to remember that the goal of any business analytics project is not Truth with a capital T but converting raw data into insights, inferences or predictive models that can lead to better decisions. The goal is not Truth but true enough to be useful. This is the essence of Boxs motto, one that becomes clearer in one of its less quotable versions: Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful.24 The thought seems transparent to the point of requiring no comment. Yet in practice we see it violated frequently and in a variety of ways. Examples include: The data perfection syndrome: Organizations often defer analytics projects until such time as an elaborate analytics data warehouse has been constructed. One often hears comments like first we need to get our data house in order. Fair enough, but in many situations this can amount to leaving on the table millions of dollars of savings that could be realized from imperfect and provisionalyet practically effectivemodels built with imperfect data. A common sentiment is that ones data needs to be in excellent shape in order to begin analysis. This is typically a mistake. Just as all models are wrong, one could also say that all databases are incomplete.

We have found that, more often than not, something useful can be gleaned even from highly imperfect data. Indeed, analyzing provisional or imperfect data can help focus the organizations thinking about what new data elements to collect or how to improve the collection of existing data elements.25 Furthermore, incomplete data can often be augmented by publicly available or thirdparty data sources. The super-model syndrome: An analogous organizational bias is failing to distinguish between a good-enough, satisficing model and a theoretically ideal model. As with holding out for perfect data, significant benefits are often sacrificed by engaging in a snark hunt for model perfection or failing to account for the opportunity cost of striving for greater degrees of accuracy. We believe that this organizational tendency results at least in part from a magical view of models as repositories of truth rather than inherently imperfect but (in varying degrees) useful decision tools. Outsourced critical thinking: A related organizational bias is a nave belief that the answers are all in the data or the quants have figured this out for us. These are perhaps not bad guiding principles in data-rich, low-risk situations such as recommending books and movies. But in cases where the data are messy, incomplete, ambiguous and/or of limited quantity, considerable institutional knowledge, domain expertise and common sense is needed to effectively make sense of it. Popular phrases such as data mining might be partly to

161

Talent

blame here. Mining for nuggets of gold is a helpful metaphorical image for a certain kind of algorithmic-powered knowledge discovery. But real-world data analysis more often resembles a dialogue between indications from data and the active hypothesis formation and critical thinking of the data analyst. Furthermore, there is no way to guarantee that the people within an organization best equipped to analyze the data (analysts) are also in the best position to interpret the results. We have been privy to a number of predictive modeling projects that ended badly because the business people outsourced necessary critical thinking entirely to analytics personnel who, while skilled, did not have the appropriate perspective to properly design the analysis and interpret the results. In more than one case, we have witnessed the results of analysts who actually built models to predict the wrong quantitya decision that should have been discussed and signed off on near the beginning of the project! Over-confident analysts: Analytics experts are humans, too.26 And just like the decision-makers whom models are intended to help, analytics experts can be overly confident both in their abilities and in the accuracy of their judgments. This can be exacerbated by the fact that analytics experts possess uncommon skills that many consider advanced or esoteric. However, specialist quantitative skills are not the same thing as critical thinking ability. To take one example, we encounter arguments from authority with unfortunate regularity. This has manifested itself (for example) in analysts stonewalling or rejecting useful methods that do not conform to textbook assumptions; electing to predict an easy (such as a binary) quantity that conforms to textbook assumptions rather than attempting to predict a more complex (for example highly skewed) quantity that would yield more powerful results; or mistaking statistical significance for business significance.27 More generally, we have nearly all felt the
162

ramifications of an outright modeling blunder. As was widely reported in the wake of the 2008 market downturn, at least one rating agency used a model of home price changes that could not accept negative numbers.28 In such cases the damage can be mitigated or avoided by injecting critical thinking, checks and balances, and communication among people with a variety of perspectives into the process. Analytics should be viewed neither as an ivory tower nor a back room exercise. Glamorous models: Here another George Box quote is apropos: Statisticians, like artists, have the bad habit of falling in love with their models. A common manifestation of this tendency is continuing to refine an analysis or model past the point of diminishing returns. A less obvious manifestation is failing to appreciateor failing to communicatea models limitations, assumptions or inherent risks. Once again, a dramatic example came to light after the market downturn. The statistician and Wall Street quant David X. Li, at one time called the worlds most influential actuar, became famous for a model that greatly simplified the complex relationships among the various securities underlying collateralized debt obligations.29 Lis model seemingly offered its users the ability to price complex securities that had been considered too difficult to price. Unfortunately, the model was too simple to support its widespread use. Boxs aphorism notwithstanding, it was not Li himself who fell in love with his model; it was the larger derivatives pricing world. Well before the 2008 crash, Li both articulated the limitations of his model and nicely captured a type of organizational bias in the adoption of models: The most dangerous part is when people believe everything coming out of [the model].30 Lis comment speaks to the dangers of magical thinking about analytics and models: the notion that models are repositories of truth rather than inherently provisional

The Talent Paradox: A 21st century talent and leadership agenda

and imperfectbut usefultools for guiding actions. In an interview, economist and Financial Times columnist John Kay provided a clear statement of this position, one that is perhaps less open to misinterpretation than Boxs concise motto. Kay was asked why investment models, built by people with quantitative PhDs from elite universities, appeared to fail. Kay replied:
Put simply, people made the mistake of believing the model. The people who built themthe mathematics PhDs didnt know very much about the world. The people who knew about the world didnt understand the mathematics. Both groups had inappropriate confidence in the value of these models. They arent uselessbut models can only illuminate the world, never be a substitute for judgment.31

helps reduce the chances of nasty downstream surprises, expensive implementation snags and unmet expectations that manifest themselves only at the close of a project. Conversely, such dialogue can help achieve organizational buyin of analytics in an organic, incremental way rather than via a collision between data analysis and traditional judgment-driven modes of decision making. In many organizations, promoting such communication is as important an executive function as articulating a strategic vision for analytics in the first place. Above all such dialogue can help the organization avoid the extremes of skepticisminduced inaction and delay resulting from pursuing unnecessary degrees of perfection. Both extremes are expensive places to reside. Originally published in Deloitte Review #10, 2012 About the authors

Achieving Balance

rganizationS wishing to be first-rate analytical competitors should therefore cultivate the ability to function without losing sight of two opposing ideas about business analytics. On the one hand, in domain after domain, many models have been shown to be effective in helping human specialists make decisions more consistently, accurately and economically. Models are useful. On the other hand, models in these domains often tend to be not repositories of truth but rather inherently provisional decision tools that benefit from continual improvement. The goal is therefore not so much to choose between specialists and equations but rather to set up a virtuous cycle whereby one continually works to improve the functioning of the other. While there is no simple recipe for achieving this, promoting dialogue between groups with different perspectives and skills is a good way to begin. Modelers can do more effective work when they are in continuous dialog with the decision-makers for whom their work is intended. Not incidentally, this also

James Guszcza is the national predictive analytics lead for Deloitte Consulting LLPs Advanced Analytics & Modeling practice. He is also an assistant professor of Actuarial Science in the School of Business at the University of WisconsinMadison. John Lucker is a principal and the Advanced Analytics Human Capital market leader in Deloitte Consulting LLP. He is also a U.S. leader in Deloitte Touche Tohmatsu Limiteds Deloitte Analytics group.

Endnotes
1. Wells actually wrote, The time may not be very remote when it will be understood that for complete initiation as an efficient citizen of one of the new great complex world wide states that are now developing, it is as necessary to be able to compute, to think in averages and maxima and minima, as it is now to be able to read and write. H. G. Wells, Mankind in the Making (1904). Wells is commonly paraphrased as having written statistical thinking. 2. A recent example: Michael Lewis book Moneyball, a book which we view as popularizing the concept of actuarial versus clinical judgment, has recently been turned into a major Brad Pitt

163

Talent

movie. (A landmark academic article in this field is Clinical versus Actuarial Judgment by R.M. Dawes, D. Faust, and P.E. Meehl, Science, 31 March 1989 <http://www.sciencemag.org/ content/243/4899/1668> ). A second example is a journalist at Slate magazine taking an online Stanford University Machine Learning class and blogging about the experience. See Blogging the Stanford Machine Learning Class by Chris Wilson, Slate, October 18, 2011. <http://www.slate.com/articles/technology/ future_tense/features/2011/learning_machine/ stanford_machine_learning_class_week_1_ what_what_richard_scarry__0.html> 3. Irrational Expectations Deloitte Review Issue 4, 2009 and Beyond the Numbers Deloitte Review Issue 8, 2011 4. Supervised learning involves predicting or explaining a well-defined target variable. Regression analysis is a common example of supervised learning. Unsupervised learning involves finding interesting patterns, associations, or groupings in a multidimensional database. Consumer segmentation is an example of unsupervised learning. 5. See for example, Factorization Meets the Neighborhood: a Multifaceted Collaborative Filtering Model, by Yehuda Koren: <http:// public.research.att.com/~volinsky/netflix/ kdd08koren.pdf> Koren is a member of the team that won the Netflix Grand Prize. 6. One of our favorite counterintuitive examples was used to open Ian Ayres book Super Crunchers: the Princeton Economist Orley Aschenfelter has successfully used simple regression models to predict the future value of fine Bordeaux vintages from basic information about growing season temperatures and rainfall. The initial reaction of eminent wine critics was one of dismay and disbelief. This is understandable because one would intuitively think that judging wine quality would be an example where objective, statistical analysis is helpless against the nuanced perceptions of a sophisticated palate. A rich, oakey blend of data, scholarship, and tasting reports is available at Aschenfeters website: <http://www.liquidasset.com/> 7. See A Crisis in the ER in Malcolm Gladwells book, Blink: The Power of Thinking without Thinking (Little, Brown and Company, 2005). 8. Impact of a Clinical Decision Rule on Hospital Triage of Patients with Suspected Acute Cardiac Ischemia in the Emergency Department, JAMA, July 17 2002. <http://jama. ama-assn.org/content/288/3/342.full.pdf>

9. See Effects of Computerized Clinical Decision Support Systems on Practitioner Performance and Patient Outcomes, JAMA, March 9, 2005 <http://jama.amaassn.org/content/293/10/1223.short> 10. See Improving Clinical Practice Using Clinical Decision Support Systems: a Systematic Review of Trials to Identify Features Critical to Success, BMJ, March 14, 2005 <http://www. bmj.com/content/330/7494/765.full.pdf> 11. See The Checklist by Atul Gawande in the December 10, 2007 issue of The New Yorker <http://www.newyorker.com/ reporting/2007/12/10/071210fa_fact_gawande> or The Checklist Manifesto by Atul Gawande (2011 Picador). 12. See How to Take American Health Care From Worst to First, Billy Beane, Newt Gingrich, and John Kerry, The New York Times, October 24, 2008 <http://www.nytimes. com/2008/10/24/opinion/24beane.html> 13. Michael Lewis, Moneyball: the Art of Winning an Unfair Game (W. W. Norton & Company, 2003). 14. The concept of evidence-based management is by no means original with us. A good resource is Hard Facts, Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management by the Stanford professors Jeffrey Pfeffer and Robert I. Sutton (HBS Press, 2006). Also a good source is Pfeffers and Suttons website <http:// www.evidence-basedmanagement.com> 15. In his book Super Crunchers, Ian Ayres elegantly captures this thought: The rise of statistical thinking does not mean the end of intuition or expertise. Rather, [it] underscores how intuition will be reinvented to coexist with statistical thinking. Increasingly, decision makers will switch back and forth between their intuitions and data-based decision making. Their intuitions will guide them to ask new questions of the data that nonintuitive number crunchers would miss. And databases will increasingly allow decision makers to test their intuitionsnot just once, but on an ongoing basis while there is now great conflict between dyed-in-the-wool intuitivists and the new breed of number crunchers, the future is likely to show that these tools are complements rather than substitutes. Each form of decision making can pragmatically counterbalance the greatest weaknesses of the other. (page 195) 16. Daniel Kahnemal also discusses this issue in the chapter The Hostility to Algorithms in Thinking, Fast and Slow. 17. In Administrative Behavior: A Study of Decision-Making Behavior in Administrative

164

The Talent Paradox: A 21st century talent and leadership agenda

Organizations (4th ed), page xi, the polymathic scholar and proto-behavioral economist Herbert Simon writes: Decisionmaking is at the heart of administration. 18. The University of Minnesota psychologist Paul Meehl was a pioneering figure in the academic study of what has come to be called actuarial versus clinical prediction. Towards the end of his career, Meehl commented, There is no controversy in social science which shows such a large body of quantitatively diverse studies coming out so uniformly in the same direction as this one. When you are pushing over 100 investigations, predicting everything from the outcome of football games to the diagnosis of liver disease, and when you can hardly come up with half a dozen studies showing even a weak tendency in favor of the clinician, it is time to draw a practical conclusion. Causes and Effects of My Disturbing Little Book, Journal of Personality Assessment 50, pp. 370375. In Thinking, Fast and Slow, (Chapter 21Intuitions vs. Formulas) Daniel Kahneman reports that Meehl was one my heros from the time I read his Clinical vs. Statistical Prediction: a Theoretical Analysis and a Review of the Evidence. 19. See chapter 15, Linda: Less is More in Thinking, Fast and Slow by Daniel Kahneman, Farrar, Straus, Giroux 2011. 20. In a recent edge.org master class, Kahneman reminisced that his seminal research in cognitive heuristics and biases was in part motivated by his experience teaching a statistics class. He found the material he was teaching very unintuitive and began to wonder whether this was due to a fact of human psychology that humans are not good intuitive statisticians. See The Marvels and Flaws of Intuitive Thinking by Daniel Kahneman at <edge.org: http://edge.org/conversation/ the-marvels-and-flaws-of-intuitive-thinking> 21. Consistent with this hypothesis is the work of the University of Pennsylvania psychologist Philip E. Tetlock. In his book Expert Political Judgment: How Good is it? Tetlock discussed a study of many thousands of predictions made by experts in a variety of fields. Tetlock found that the experts performed little better than random chance, and worse than statistical algorithms. Furthermore, the more prominent experts fared worse than their less celebrated counterparts. It is likely that some of the high-profile experts success is due to their overconfidence as well as the narrative appeal of their forecasts, rather than to the accuracy of their predictions. Tetlock wrote that, there is no reason for supposing

that contributors to top journalsdistinguished political scientists, area study specialists, economists, and so onare any better than journalists or attentive readers of the New York Times in reading emerging situations. For an informative review of Tetlocks book, see Everybodys an Expert by Louis Menand in the December 5, 2005 New Yorker. <http://www.newyorker. com/archive/2005/12/05/051205crbo_books1> 22. This is an example of a phenomenon that Timur Kuran and Cass Sunstein call the availability cascade: a collective believe formation process in which a perception or attitude becomes steadily more plausible as it becomes more prominent in a groups discourse. Kuran, Timur and Sunstein, Cass R. , Availability Cascades and Risk Regulation, Stanford Law Review, 51 (April 1999): 683768 23. Empirical Model-Building and Response Surfaces (1987), by George EP Box and Norman R. Draper 24. Ibid. 25. For example, one of us had a recent conversation with an executive at a financial services company who had spent years overseeing the development of a large analytical data warehouse without having a clear idea of what the data would be used for. 26. Although sometimes we wonder. One of us made the mistake of trying Daniel Kahnemans Linda experiment on a group of senior actuarial science majors at The University of Wisconsin. They got it right with hardly a moments thought. 27. Deirdre McCloskey wrote about this issue in her book The Cult of Statistical Significance. 28. See, for example The End by Michael Lewis in Cond Nast Portfolio.com, December 2008 <http://www.portfolio.com/newsmarkets/nationalnews/portfolio/2008/11/11/ The-End-of-Wall-Streets-Boom> 29. See The Formula that Felled Wall Street, Financial Times, April 24, 2009 <http://www. ft.com/intl/cms/s/2/912d85e8-2d75-11de9eba-00144feabdc0.html#axzz1cspGosg2> 30. See Slices of Risk by Mark Whitehouse, The Wall Street Journal, September 12, 2005. <http://math.bu.edu/people/murad/ MarkWhitehouseSlicesofRisk.txt> 31. See The Long and the Short of It: John Kay interview and review, Financial Times, February 1, 2009. <http://globalcomment. com/2009/the-long-and-the-short-ofit-john-kay-interview-and-review/>

165

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. None of Deloitte Touche Tohmatsu Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2012 Deloitte Development LLC. All rights reserved.

You might also like