Strategy-Driven Talent Management

A Leadership Imperative

Rob Silzer, Ben E. Dowell, Rob Silzer, Ben E. Dowell

• Publisher: Pfeiffer
• Year: 2009
• ISBN:
  9780470540046
• Edition: 1
• Topic: Business
• Subtopic: Human Resource Management
• Index: Business

Organizations today understand that superior talent can create competitive business advantage. Executives are working with human resource managers and talent professionals to significantly improve their organization's ability to attract, develop, deploy, and retain the talent needed to achieve the organization's strategies. Effective CEOs and senior leaders are realizing that strong talent resources are as critical to business success as financial resources.

This book in the SIOP Professional Practice Series provides an up-to-date review and summary of current and leading-edge talent management practices in organizations. A comprehensive book, Strategy-Driven Talent Management brings together an outstanding group of leading practitioners who present state-of-the-art ideas, best practices, and guidance on how to recruit, select, assimilate, develop, and retain exceptional talent and integrate talent management efforts with organizational strategy. Written for human resource professionals, industrial-organizational psychologists, and corporate executives, this key resource is a clear must-read guide to the emerging field of strategic talent management.

Strategy-Driven Talent Management

• shows how to build competitive advantage through an integrated and strategic talent management program
• summarizes what it takes to attract, develop, deploy, and retain the best talent for the strategic needs of an organization
• reviews critical issues such as managing talent in global organizations and measuring the effectiveness of talent management programs
• includes case examples and CEO interviews from leading-edge companies such as PepsiCo, Microsoft, Home Depot, Cargill, and Allstate, which reveal how each of these organizations drives talent management with their business strategies

This essential must-have HR resource offers insight into the future of strategic talent management, an extensive annotated bibliography and suggestions for preparing the next generation of organizational leaders.

Part One

General Frameworks

CHAPTER 1

STRATEGIC TALENT MANAGEMENT MATTERS

Rob Silzer, Ben E. Dowell

A Leadership Imperative

Why do organizations succeed or fail? Ultimately it comes down to talent. Did the organization have the talent to make the right decisions regarding where to invest financial and human resources, how to innovate and compete, and how to energize and direct the organization to achieve the business strategy? For good or ill, people make the decisions and take the actions that result in the success or failure of their organization. Many times CEOs (chief executive officers) get all the credit or all the blame, but in our experience, it is the quality of talent throughout the organization that ultimately leads to the creation and effective execution of successful strategy. Gary Hamel argues that “people are all there is to an organization” (cited in Sears, 2003). Collins (2001) suggests that having the right people comes before having the right strategies.

Have you ever asked a CEO or senior executive what issues he or she spends the most time on and worries about the most? Based on our sixty years of combined business experience across many corporations, our answer is that the most effective CEOs and senior executives focus as much on talent issues as they do on financial issues. Jack Welch (2006) made the point that talent management deserves as much focus as financial capital management in corporations. Larry Bossidy (2001) concludes that “there is no way to spend too much time on obtaining and developing the best people.” Other CEOs in a recent interview study seem to agree, suggesting that talent management takes as much as 50 percent of their time (Economist Intelligence Unit & Development Dimensions International, 2006; Silzer, 2002a). Similar conclusions are reached on the critical importance of talent and talent management by other professionals and thinkers in the field and by various executive and corporate surveys (Bernthal & Wellins, 2005; Hewitt Associates, 2005; Michaels, Handfield-Jones, & Axelrod, 2001; Corporate Leadership Council, 2006; Morton, 2004; Lawler, 2008; American Productivity and Quality Center, 2004).

Financial resources may be the lifeblood of a company, but human resources are the brains. It has long been accepted that sound financial management is critical to business survival. This is especially true in challenging economic times. However, having strong talent and sound talent management is equally critical to business survival.

Linking Talent and Talent Management to Financial Outcomes

There has been some agreement that having strong talent in the company has a positive impact on business outcomes (Lawler, 2008; Michaels et al., 2001). A McKinsey survey of 4,500 senior managers and officers at 56 U.S. companies (Axelrod, Handfield-Jones, & Welsh, 2001) found that senior executives report that “A” players, (defined as the best 20 percent of managers) who are in operational roles raise productivity by 40 percent over average performers; those who are in general management roles raise profitability by 49 percent over average performers; and those who are in sales roles raise sales revenues 67 percent more than average performers.

One manufacturing company found that the best plant managers increased profits by 130 percent, while the worst managers brought no improvement. It should be noted that the productivity ratings were survey estimates by senior executives, so the estimates may include some subjective bias.

Business executives have suggested that talent management practices need to lead to measurable financial business results. Gubman (1998, p. 294) reviews the “large and growing body of evidence from a variety of sources that shows being an employer that values its workforce, demonstrates it, and tries to improve talent management practices tied to business strategy pays off with better long term financial performance.” He suggests that “more than 100 pieces of research have been conducted in the last 10 to 15 years trying to connect management practices with financial success.”

Some studies connect having a people-oriented culture with financial gains. For example, Collins and Porras (1994) found that the cumulative stock return since 1926 for visionary companies, defined as “role models for management practices around the globe,” outperformed the general stock market by more than 15 times. However companies matched to the visionary companies on other factors outperformed the general market by only two times. When they investigated how these visionary companies “construct their culture,” they found differentiating criteria that include these talent management practices:

• Extensive new employee orientation

• Use of selection and rewards to align employees with company values

• Formal management development programs

• Careful succession planning and CEO selection

• Investment in human capabilities through recruiting, training, and development

Pfeffer (1994) first identified companies with the highest total return to shareholders (stock appreciation plus dividend yield) and discovered that they differ from other companies on the way they managed people, with some specific distinctions in selection, training, labor relations, or staffing.

A number of studies looked at how the number of talent management practices used might relate to financial performance. Huselid (1995) rank-ordered 700 companies and grouped them by quintiles based on the number of basic talent management practices (such as recruiting, selection, training, performance appraisal, and pay practices) they used in their company. He demonstrated a significant and progressive increase in annual shareholder return and gross return on capital, with higher-quintile companies showing progressively larger returns. A follow-up study on 986 companies with a more refined list of management practices found a significant increase in sales per employee, market value per employee, and cash flow per employee and a decrease in turnover for companies that used more of the human resource (HR) practices (Huselid, 1995).

McKinsey followed up their original research, The War for Talent (Michaels et al., 2001), with several more extensive survey studies. In a 2000 McKinsey survey of 6,900 managers, including 4,500 senior managers and officers at 56 U.S. companies, Axelrod et al. (2001) concluded that the companies doing the best job of managing talent (in the top 20 percent on self-identified talent management practices) outperform their industry’s mean return to shareholders by 22 percent.

McKinsey also looked at the impact of global talent management practices. In a study of 22 global companies and 450 CEOs, senior managers, and HR professionals, Guthridge and Komm (2008) sorted the companies into three groups based on their combined company score on ten dimensions of global talent management practices. The research found a significant relationship between a company’s global talent management score and financial performance. Companies scoring in the top third based on a combined talent management score earned $168 average profit per employee compared to $93 for the bottom third of companies. The following are the talent practices that most distinguished the companies in the top and the bottom thirds on the combined talent scores:

1. Creating globally consistent talent evaluation processes

2. Achieving cultural diversity in global setting and

3. Developing and managing global leaders

Companies achieving top third scores for any one of these three practice areas had “a 70 percent chance of achieving top third financial performance” (p. 4). In other words, doing any one of these practices seemed to relate to higher financial performance. Other talent practice areas that also distinguished the top third from the bottom third were translating human resources information into action, creating internal talent pools, and sourcing and recruiting global talent.

Several researchers have looked at the link between a specific talent practice and financial measures. Danielle McDonald at Hewitt Associates studied 432 companies (cited in Gubman, 1998) and looked at the impact of having a formal performance management process versus having no process, or a simple informal one, on financial measures. She found a significant link to higher return on equity (ROE), return on assets (ROA), return on investment (ROI), total shareholder return, sales per employee, and income per employee over a three-year period. The study concluded that companies with a formal performance management process had higher profits, better cash flows, stronger market performance, and greater stock value. In addition, McDonald looked at financial indicators before and after performance management process implementation and found statistically significant improvements after implementation in total shareholder return (24.8 percent increase) and sales per employee (94.2 percent increase) over a three-year period.

Other studies found similar links to financial results for other practices. Bernthal and Wellins (2005) showed a relationship between having stronger leadership development systems and higher ROE and profit for companies when compared to competitors. A 1999 study by the Sibson & Company and McKinsey Associates (cited in Wellins, Smith, & McGee, 2006) showed a link between the quality of the company’s succession management program and increased shareholder returns. And studies by Lawler, Mohrman, and Ledford (1995) found a significant relationship between the use of employee involvement programs in a company and larger ROA, ROI, ROE, and return on sales, but the use of the programs had only a modest impact on employee productivity measures and no impact on total return to investors. However, one study by Watson Wyatt Worldwide (2001) found that the use of a multirater feedback survey had a negative correlation with organizational performance. Perhaps poorer performing companies saw a greater need to improve management performance by giving competency ratings feedback to managers.

In general, the relationship between the implementation of talent management practices and an impact on business results is a difficult area to study because of the confounding list of other variables that might also have an impact on these financial outcomes. From our perspective, there does seem to be a link between talent practices and financial outcome measures, but it would be premature to conclude that it is causal.

In many successful business corporations, talent management receives attention similar to that given to financial management. It is a leadership imperative for them. For many years, leading companies have seen effective talent management as a competitive advantage over other companies that give limited attention to their talent. Leading corporations, among them, PepsiCo, Microsoft, Home Depot, Ingersoll Rand, Cargill, and Allstate (all explored in individual chapters in this book), understand that talent management is more than just a competitive advantage; it is a fundamental requirement for business success. These corporations tend to have talent management systems and processes that are both integrated and strategic—focused on achieving specific business objectives. A frequent and comprehensive talent review is now often seen as one of the core business processes in the corporation, along with operational reviews and financial reviews.

Business Reasons for Talent Management

Talent management is now more than a desirable HR program: it is a leadership imperative. It is difficult for any business corporation to succeed in the long term without making talent central to the business model. This is particularly true because of the complex business challenges that need to be addressed.

The business environment since the early 1990s has gone through a significant expansion with falling trade barriers and the globalization of business. For many companies, growth has come through global expansion, particularly into China and India. This expansion has put a premium on having the global talent needed to support these initiatives (McCall & Hollenbeck, 2002; Sloan, Hazucha, & Van Katwyk, 2003) and has provided great visibility to successful global leaders (Kets DeVries & Florent-Treacy, 1999). This has resulted in greater competition for the best talent (Michaels et al., 2001). The growing worldwide demand for talent, along with the shrinking availability of exceptional talent, has made talent acquisition, development, and retention a major strategic challenge in many companies.

The business world is changing in many ways and there are a number of factors that have contributed to the critical significance of talent:

• An increasing worldwide demand for talented leaders and executives with the growth of emerging markets in Asia and Latin America

• A shrinking pool of experienced and talented leaders in the Americas, Europe, and Japan

• The complexity and faster pace of global business and the need to have talent available to adapt quickly to changing business conditions

• The realization that within an industry there are specific organizational capabilities necessary to achieve competitive advantage and a need to recruit and retain the leading talent with specialized competence to build that capability

• The difficulty of retaining critical talent due to a shift to self-managed professional careers where talented individuals aggressively pursue their careers and actively seek advancement by moving across different companies and geographic boundaries

Corporations have gone through several business cycles since the 1980s and have learned some lessons about being successful. One major trend has been to look carefully at internal costs and expenses and identify as many ways as they can to make sure the organization runs as efficiently and lean as possible. For example, this has led to centralized shared services, outsourced functions, and an ongoing expectation that a compelling business case needs to be made to retain or invest in a function, program, or initiative to determine if it continues to add value or will add value in the future to the corporation. The strategic objectives of the company are now central to most business decisions. Executives want to clearly see how a function, program, or initiative contributes to achieving their specific business strategies.

Strategically Driven Human Resources

Most organizational functions and capabilities must now demonstrate their strategic value to the company. The Human Resources function is now under the same scrutiny. HR, like other corporate functions, has increa...