www.stepstone.com

A report from the Economist Intelligence Unit

StepStone Total Talent Report 2008

www.stepstone.com

Sarah MurrayJanuary 2008

www.stepstone.com

About the researchStepStone commissioned the Economist Intelligence Unit to write this Talent Management report. The report is based on an Economist Intelligence Unit survey of 395 senior executives. Forty percent of respondents came from organisations with over US$1bn in annual revenue. Firms were spread across 19 sectors, with the highest number (20%) coming from financial services. Close to half the respondents described one of their main functional roles as human resources. Thirty-two percent were c-level executives, with a further 13% directors, vice-presidents or senior vice-presidents.

In addition, the Economist Intelligence Unit conducted a programme of interviews with senior executives and academics within the field of talent management.

Executive summary As the operations of large multinational companies become ever more broadly dispersed, with increased investments in emerging markets, competition for talent is becoming global. Meanwhile, companies are navigating a complex set of demographic, social and economic shifts that vary from market to market.

For employers, this makes the task of talent management a highly complex business that requires a strategic approach to designing recruitment and retention programmes that will supply the skills and leadership needed to remain competitive. However, some companies are still struggling to manage talent across different borders and generations, often because they have not established formal talent management structures.

In this report we look at the where the greatest difficulties lie for organisations when it comes to attracting and retaining top talent and highlight the best practices of companies that are successfully managing their global workforce.

www.stepstone.com

• As companies expand globally, they need to establish talent management strategies in new markets. Despite the recent fears associated with the US credit crunch, businesses worldwide remain positive – just – about their prospects. The Economist’s October global business barometer puts business confidence at +13 (on a scale of -100 to +100). Within our own survey most respondents see Asia-Pacific as providing the best opportunities for revenue growth. The findings suggest that economic development and rising skills in these emerging markets will be an advantage to companies when it comes to recruiting talented individuals. However, with demand for talent in the region far outstripping supply, firms will have to ramp up pay and offer improved working conditions if they are to exploit its potential.

• Recruiting and retaining top talent is becoming harder. Executives cite overly high salary expectations and a shortage of candidates with appropriate skills as obstacles to hiring skilled individuals. A growing tendency of employees to change jobs is fuelling talent shortages in many companies, while lack of suitable career opportunities provides a common barrier to retaining talented individuals.

• Many companies have yet to establish talent management at the strategic centre of their businesses. Most respondents say that in their company talent is managed on an informal basis, with a lack of alignment between formal qualifications and the needs of

the business. Moreover, most attention focused on individuals with the greatest leadership or performance potential. Individuals within areas of acute skills shortage receive less attention.

• Career opportunities and linking pay to performance are common tools in talent management. Whereas in the past companies have focused on pay and benefits, there is an increasing recognition of the importance of training and development, as well as of the need for mentoring and coaching programmes, in overcoming recruitment and retention difficulties. Respondents cite performance -related pay and bonuses for individual performance as the most common means of rewarding employee performance. Although providing the right basic salary is still considered important, offering career development opportunities is seen as the best way to retain key employees.

• Individual assessment remains the preferred method of tracking employee performance. Fewer respondents cite techniques such as 360-degree assessment, team appraisal and peer appraisal as tools used by their organisations.

• Technology is becoming increasingly prevalent. Whether using company-branded recruitment portals, social networking sites to promote a company’s image, “virtual” mentoring schemes or implementing skills-tracking platforms, innovative use of technology is becoming one of the keys to recruiting and retaining talent.

Key findings from this research include the following:

www.stepstone.com

IntroductionCompanies are operating in a talent landscape that is far more complex than ever before. Not only do they need to recruit heavily from non-traditional markets, they must also design strategies to deal with demographic shifts that are highly regionalised. As a result, talent management is an increasingly challenging part of business. In our survey, 41% of respondents believe attracting and retaining skilled employees will become significantly harder, and 45% agree that their organisation is currently experiencing a shortage of talent.

For a start, employees are becoming more demanding. Today, top executives expect to be offered a chance to move around within the organisation, and young employees entering the workforce have high

expectations of what companies should be offering them in terms of experience and development. As a result, the ability to offer attractive career opportunities has become one of the most important elements of attracting and retaining talented individuals.

Rates of remuneration remain important; 43% of executives seeing this as the most important factor for retaining key employees. However, career development opportunities are seen by almost half as the most powerful tool in this respect. And although 54% of the respondents to our survey say they have used the offer of higher starting salaries to overcome recruitment difficulties in the past, a significantly lower proportion (24%) say they would deploy this strategy again in the future.

Table 1 How would you describe the difficulty of recruiting and retaining top talent in the country where you work?

Overall

Asia

Europe

North America

0 20 40 60 80 100

Getting significantly harder

Getting slightly harder

More or less the same

Getting slightly easier

Getting significantly easier

www.stepstone.com

Table 2

Have undertaken

in past

Would undertake in future

Don’t know

Provide additional training so that positions can be filled by internal candidates

46% 36% 18%

Improve benefits package47% 33% 21%

Offer higher starting salaries54% 24% 22%

Offer relocation packages42% 23% 36%

Flexible place of work40% 31% 29%

Select candidates who don’t fulfil all criteria then provide training

37% 30% 33%

Flexible working hours46% 28% 26%

Consider older and semi-retired workers26% 33% 40%

Increased use of outsourcing33% 33% 34%

Provide financial incentives for staff to recommend candidates

36% 29% 35%

Reorganise teams to reduce need for recruitment41% 34% 25%

Investing in recruitment management software22% 31% 47%

Advertise positions overseas25% 31% 44%

Developing company-branded Internet recruitment portal

37% 31% 32%

Which steps has your organisation undertaken in the past to overcome recruitment difficulties, and which would it consider undertaking in the future?

www.stepstone.com

As well as meeting rising employee expectations, companies are also facing an increasingly complex talent landscape. For global companies, the highly regional nature of demographic shifts is a challenge. While workforces are aging in Europe, younger employees dominate in other markets. In China, the one-child policy is changing the demographic structure of the country – according to the World Bank, the proportion of China’s population aged 65 and over will rise from just 10% in 1995 to 22% by 2030 – while in India the urban population is growing quickly.

At the same time, new talent pools are emerging in places such as Russia, Brazil, China and India. Our research indicates that growth in these economies is assisting companies in their skills acquisition programmes, with 38% of respondents citing economic development in emerging markets as an advantage when it comes to the ability to recruit talented individuals. However, despite this potential, companies are under no illusion that recruiting and retaining talent in emerging markets – and particularly Asia – will prove a hard battleground. With demand high, and staff turnover in the region running at 14% a year, having a clear strategy will be a pre-requisite for success.

Update - January 2008

To ensure that the results of our survey remained relevant, in the light of the toughening market conditions - particularly in the US - the Economist Intelligence Unit went back to the original survey panel in December to check whether business sentiment had changed since the questionnaire was first run in September. Interestingly, despite daily negative reports, executives remained sanguine about their companies’ prospects. Indeed, although the number of executives who believed they would see significant improvement in their growth prospects over the next three years fell slightly, from 50% to 46%, the number who expected a slight improvement increased from 37% to 44%. Furthermore, our survey suggested that the sub-prime crisis is not the problem most concerning executives. More important considerations, it seems, are a weak dollar (39%) and the price of oil (38%).

www.stepstone.com

Another challenge is that employers are faced with a workforce that now contains four distinct generations, all with different career expectations. In particular the youngest – the so-called Gen Y – is entering the workforce with skills and expectations that are markedly different from those of previous generations.

However, in all demographic groups, the way people see their career developing is changing, with executives demanding ever more flexibility in the way they work and expecting to move jobs more frequently. In our survey, 37% of respondents saw the increasing expectation of employees to move jobs or change careers as

fuelling staff shortages. Despite these challenges, our results indicate that many companies have yet to establish a formal structure that would facilitate a more strategic approach to the management of talent. Some 34% of executives said that their company had only an informal approach to this part of the business, and 16% had no talent management strategy at all.

It is perhaps not surprising, therefore, that few respondents see their company as managing talent “very successfully”. Only 13% believed their organisation was excelling in attracting talent, with even fewer (7%) seeing the retention of talent as being very well managed.

How beneficial, or damaging, do you think the following economic and political trends will be for your organisation’s ability to recruit talented individuals?

Table 3

1Very

beneficial

2 3Neutral

4 5Very

damaging

6Don’t know

Opening of labour markets 19% 31% 36% 5% 3% 5%

Rising skills levels in emerging markets

28% 42% 20% 6% 1% 3%

Economic development in emerging markets

26% 38% 21% 11% 3% 2%

Increased use of older workers 12% 31% 43% 9% 3% 3%

Increased participation of women in workforce

24% 38% 34% 3% 2% 1%

Decline of unionisation 18% 22% 48% 5% 2% 5%

Urbanisation in emerging markets 13% 30% 41% 10% 3% 4%

Rise of protectionism 3% 7% 27% 34% 24% 5%

Industry consolidation 7% 27% 38% 19% 5% 5%

Shift from public to private ownership

15% 27% 42% 9% 2% 4%

www.stepstone.com

In the next three years, which of the following social trends do you think is most likely to fuel talent shortages in general at your organisation?

Table 4

Overall Asia EuropeNorth

America

Increasing expectation among employees to switch careers/jobs

37% 45% 40% 26%

Lack of alignment between formal qualifications and needs of the business

23% 23% 15% 20%

Migration of talent overseas 12% 13% 14% 19%

Ageing population 10% 7% 13% 14%

Low unemployment rates 9% 6% 9% 13%

Declining standards of secondary/tertiary education

7% 4% 8% 4%

Which of the following best describes your organisation’s talent management strategy?

Table 5

Overall Asia EuropeNorth

America

We have a formal, company-wide talent management strategy

25% 26% 32% 19%

We have a formal talent management strategy, but only in certain parts of the company

23% 27% 23% 23%

We have an informal talent management strategy

34% 31% 30% 38%

We do not have a talent management strategy 16% 16% 15% 19%

www.stepstone.com

How successfully do you think your organisation manages the following aspects of talent management?

Table 6

1

Very successfully

2 3Neutral

4 5Very

poorly

6Don’tknow

Developing talent in the organisation

8% 45% 25% 16% 5% 1%

Attracting talent to the organisation

12% 45% 21% 16% 5% 0%

Conducting and learning from exit interviews

4% 18% 23% 26% 23% 5%

Identifying talent within the organisation

12% 41% 25% 15% 7% 0%

Measuring performance of employees

9% 33% 29% 22% 7% 0%

Linking performance metrics to broader business objectives

8% 28% 32% 20% 9% 2%

Setting appropriate compensation and benefit levels

10% 36% 29% 18% 7% 0%

Retaining talent in the organisation

7% 32% 25% 24% 10% 1%

Linking performance with reward

10% 34% 25% 19% 13% 0%

Succession planning for top management positions

7% 28% 29% 18% 15% 3%

Forecasting talent requirements 4% 24% 33% 25% 12% 2%

Ensuring diversity of talent pool 9% 24% 35% 21% 9% 2%

Identifying weaknesses in current talent pool

7% 25% 32% 22% 11% 2%

www.stepstone.com

A borderless talent world

There was a time when globalising your workforce meant sending expats to run operations overseas. Now, however, talent is flowing in all directions, whether that is the movement of executives from mature markets to posts in emerging economies or skilled executives from Asia or Latin America taking up positions in Europe or the US. The borderless flow of talent is such that it would now not be thought unusual to find, say, a Brazilian in charge of the eastern European division of a Japanese company.

The global flow of talent is in part a necessity. Companies that for many years have focused on their traditional recruitment markets in western Europe and the US are starting to find competition for talent in those markets intensifying, particularly in Europe, where the workforce is ageing rapidly and there is more competition for skilled, younger employees.

The dramatic economic growth witnessed in emerging markets has also affected the supply of overseas talent in North America and Europe. Ambitious graduates from China or India who once headed to the US or the EU for further education and then employment, are now seeing greater opportunities in their own countries and are returning home.

“Over the past couple of years companies have woken up to the fact that many of their markets may become constricted in the next few years due to demographic changes,” says Matt Guthridge, a consultant at McKinsey & Company. “The US has a reasonable young population coming through but in Europe, there are just fewer people in the key age brackets. Newer talent aged below 24 [is] becoming tougher to recruit.”

At the same time, new talent pools are emerging in Asia and other developing countries. In our

survey, 42% of respondents see rising skills levels in these markets as beneficial to their talent management strategies, and 28% see this as “very beneficial” (see table 3).

New population flows are easing the pressure. In the UK, for example, 75% of respondents to a 2007 survey from the Chartered Institute of Personnel and Development cited the benefits of targeting migrant workers from EU accession countries.

KPMG is one company starting to tap into new markets such as China, Russia and South America for its talent. It has launched a global careers website and is using podcasts and case studies to attract candidates.

“We have programmes to bring people from Argentina and Chile and other countries to Australia and the UK,” says Doug Jukes, the firm’s global head of people management. “Because the biggest single issue is the fact that the surpluses of talent aren’t necessarily where you need them.”

A similar strategy is in place at Merrill Lynch. “Our labour market is extremely global,” says Tracey Hahn, the company’s head of leadership and talent management for Europe, the Middle East and Africa. “We’re increasingly hiring graduates from European or Indian schools rather than UK schools because they have the skill sets we’re really after – they have excellent education in sciences, engineering and maths.”

Companies are expanding their access to human capital overseas through other business strategies too. As our research suggests, outsourcing is becoming a greater part of the talent mix, with 42% of respondents citing outsourcing as among the strategies that their organisation is likely to use to broaden its talent pool. At the same time, embarking on joint ventures with overseas

www.stepstone.com

companies is seen by 28% of executives as a means of gaining access to new talent, as is making greenfield investments (21%) in emerging markets.

Companies’ success in recruiting the right employees often depends on the power of their brand in the markets in which they operate. Traditionally that has meant that, for example, in Germany, BMW is consistently in the top ten recruiters, as is Shell in the Netherlands.

In overseas markets, companies whose products and brands are well recognised also have this advantage, as with, for example, Coca-Cola and Nike in markets such as China. Moreover, in developing countries, multinationals can offer local graduates the possibility of international career development, which can be very attractive.

An important part of establishing this brand advantage in overseas markets is building local

relationships with schools and universities by sponsoring scholarships and innovative academic programmes or establishing an on-campus presence with brand-building events. In September 2007, for example, Deloitte Touche Tohmatsu announced that it would be sponsoring a Global Business Journalism Programme at Tsinghua University, the first such programme in China.

For the past two years, in each of the main regions in which it operates, Dow Chemical has been targeting 10-20 universities that are producing graduates with the kind of technical skills it needs. “We are forming more strategic links with these key universities,” says Julie Fasone Holder, head of human resources at Dow Chemical. “We become well known on campus and students get to know Dow and our careers.” However, while Western companies may have successfully established their brands

Overall Asia Europe North America

Use of headhunters/recruitment consultants

46% 48% 45% 56%

Outsourcing 42% 44% 44% 45%

Develop own-branded online recruitment portal to build and

40% 42% 41% 35%

Mergers and acquisitions 36% 41% 32% 33%

Joint venture with overseas company

28% 34% 28% 23%

Greenfield investment in emerging markets

21% 30% 19% 19%

Offshoring 16% 19% 14% 10%

In the next three years, which of the following strategies is your organisation likely to use in locations where gaining access to new pools of talent is an important goal?

Table 7

among graduates and other job candidates in emerging markets, the increasingly global ambitions of local brands mean those organisations are providing stiff competition when it comes to recruitment. Examples include Indian companies such as Tata Group and Infosys Technologies, and Lenovo, the Chinese company that took over IBM’s personal computer (PC) business, all of whom are expanding their operations into overseas markets.

Furthermore, according to Lynda Gratton, professor of management practice at London Business School, rising multinationals in India and China will be able to compete with Western firms because they will also be able to offer their employees mobility. “If you join Tata Consulting Group in India as an Indian,”

she says, “You’re just as likely to be sent outside of India as if you joined from the UK. So there’s massive globalisation of the talent pools and of the competition for talent.”

All of which means that companies without brand recognition in these markets are being squeezed on two fronts and are having to work hard to build their reputation. “There are ways to compete on a global scale but you have to think about your brand, your employer value proposition and creating local relationships with schools,” says Mr Guthridge. “Companies who are coming into this late are having to do a bit of creative thinking.”

Asia: opportunity costs

www.stepstone.com

www.stepstone.com

Asia will prove to be something of an enigma if the results of our survey are anything to go by. Most executives are adamant that they see the region as an unparalleled business opportunity. Indeed, 44% of executives said that it will offer the best opportunities for revenue growth of any region over the next three years - three times more than cited North America, the next highest. Furthermore, close to two-thirds of respondents said that they saw economic development in emerging markets such as Asia as being either ‘beneficial’ or ‘very beneficial’ to their organisations’ ability to recruit talented individuals. Paradoxically, however, executives also believed that it would prove significantly harder to recruit and retain top talent in Asia than elsewhere (see table 8). So what lies at the heart of this seemingly muddled thinking when it comes to tapping Asia’s potential?

Perhaps it is an indication that while the rewards could be huge, only those organisations willing to go the extra mile when it comes to recruiting and retaining talent will be able to fully harness the region’s potential. One example of this might include fast-tracking individuals’ careers. Although this runs the risk of promoting people beyond their ability, this can often be preferable to losing the employee altogether. Certainly it seems that companies are thinking seriously at how they can retain talented individuals. Our survey suggests that firms operating in the region are more likely to try a whole gamut of approaches compared with elsewherefrom coaching to personal development plans to mentoring schemes. However, in a market in which the demand for talented individuals far outweighs the supply, perhaps the most telling result from our survey is that 52% of companies said that Asian candidates’ pay expectations were too high, compared with just 42% in North America for example.

Overall Asia Europe North America

Shortage of candidates 58 59 59 60

Available candidates lack appropriate skills

48 55 47 42

Pay expectations too high 46 52 45 42

Available candidates lack “fit” with culture of organisation

26 29 26 33

Candidates unwilling to relocate 20 23 25 23

Available candidates lack appropriate qualifications

20 20 14 20

Table 8 If your organisation has experienced recruitment difficulties, what are the most common reasons?

www.stepstone.com

Despite the fact that companies are obviously trying hard on the personal development front, talented individuals in Asia, it seems, are less likely to show loyalty to their employers and more likely to be lured away by a firm offering a higher salary or better working conditions. According to Hewitt Associates, an accounting firm, staff turnover in China was running at 14.4% in 2005, with a turnover of 20% not uncommon in sectors with particular shortages of manpower.

Professor Elizabeth George, from the Hong Kong University of Science & Technology Business School, says the key issue is the sheer numbers of executives that are needed. “Economies in this region are growing so fast that the pressure is on for firms to fill positions at all levels – and business schools do not produce the number of graduates that are needed,” she says.

“Also, as the economy grows the number of options that qualified individuals have has risen to the extent that it is easy for people to move jobs with great regularity. They shift jobs because they get a ‘better deal’ elsewhere. This is not necessarily defined by remuneration. Anything that sets a firm apart from its competitors – remuneration, working conditions, reputation – could be used as a tool to attract talent.”

Economist Intelligence Unit forecasts suggest that such competition is going to continue to fuel wage inflation. In China, for example, we expect growth in average wages to run at an average of 20% a year in 2007-10. Average wages in 2010 will be over three-and-a-half times higher than they were in 2002. The idea of Asia as a low-cost utopia, with an abundance of labour, it seems, is long-gone.

Table 9 Labour costs in China

Managing both locally and globally

Most companies are using a mixture of central control and devolution of responsibility for talent management. By doing this they hope to

strike a balance between setting strategies at a corporate level and giving local business units a degree of responsibility for implementing those strategies on the ground. In our research, 26%

*Forecast. Source: the Economist Intelligence Unit

0

90

180

270

360

450

2002 2003 2004 2005 2006 2007 2008 2009 2010****

14.313.0

14.115.7

17.6

20.2.3 20.2 19.9 19.7

Average wages (monthly, US$)

Growth in average wages (US$; % pa)

www.stepstone.com

Overall Asia Europe North America

Chief executive 26% 28% 23% 19%

Human resources director 24% 27% 27% 20%

Individual heads of business units 25% 25% 18% 34%

HR managers 8% 9% 9% 10%

Line managers 9% 5% 10% 8%

Other, please specify 3% 1% 6% 2%

No one has overall responsibility 6% 4% 6% 6%

of respondents report that in their organisation responsibility for talent management is the hands of the chief executive. Similar numbers say that this responsibility is managed by the human resources director (24%) and by the heads of local business units (25%).

This global-local management mix is driven by the fact that great regional variations prevail in the demographic profile of companies’ labour pool. In Asia, for example, the demand for technical and leadership skills far outweighs supply, particularly in India and China, where salaries have escalated and often are not commensurate with the position and experience of the individuals receiving them. Frequent job changes are common among young executives, who see moving around as a means of gaining a salary increase, costing companies dearly in recruitment and training expenses.

As a result, Rick Lash, North American head of leadership and talent at Hay Group, believes companies operating in these areas need to adapt their HR strategies to local cultural conditions, creating strategies that appeal to

the emotional needs of potential recruits and employees. “In India and China, where our research shows a critical shortage in senior managers, job titles and promotion grades – all symbols of status and visible career progression – need to be built into recruitment and retention strategies,” he explains.

Employees in emerging markets see scholarships and oversees training possibilities, careers postings and employment contract bonds as a demonstration of an organisation’s commitment to young professionals, Mr Lash adds.

At Pfizer, a pharmaceuticals company, talent is managed locally but with the agenda set at corporate level. The company’s current focus on diversity in the workforce, for instance, is an initiative that has been set by the senior management team but one that will be rolled out by local business units.

“We know that what this looks like will be different depending on where you are,” says Chris Altizer, the firm’s vice-president of human capital policy. “So locally, you have to adapt

Table 10 Who in your organisation is most responsible for talent management?

www.stepstone.com

your recruitment and retention strategies in terms of application. But the principles have to be established by the centre.”

Mr Altizer also points out that Pfizer, unlike companies made up of many divisions, is a single, large organisation. “That means we have to manage talent cross-functionally as opposed to cross-businesses, which is in some ways more complicated.”

As a series of national practices linked by a common brand, KPMG has an altogether different structure. However, the firm has a four-year-old group called People, Performance and Culture that initiates talent management programmes at a global level. This sets the standard and allows different units in different countries to share best practice. At the same time, the firm has a senior partner in each country who is head of people.

At Royal Bank of Scotland, core principles and practices are established for talent management and these are replicated throughout the group’s operations. “However, bearing in mind the different markets in which we operate, each group chief executive and HR director will have responsibility for creating talent pools for their function, their geography or particular marketplace,” says David May, head of leadership development at Royal Bank of Scotland and of the RBS Business School.

Struggling with strategyAlthough leading companies are fine-tuning the balance between local and global talent strategies, our research indicates that many organisations are still struggling to establish any kind of formal management strategy for this part of the business.

The largest group (34%) of respondents to our questionnaire said that their organisation’s talent management strategy was an informal one. Some 23% said that their organisation had a formal talent management strategy, but only in certain parts of the company, while 16% had no talent management strategy (see table 5). Only 19% of executives said that talent management covered everyone in their organisation.

Part of this is because companies have yet to define what talent management means for their business. In our research, 19% of respondents said that lack of clarity about the scope of their strategy was the single biggest barrier to implementing or maintaining a formal talent management strategy in their organisation. At the same time, leadership appears to be lacking in many firms, with 19% claiming that talent management in their company lacks the support of senior management.

www.stepstone.com

Table 11 Which of the following groups of individuals fall within the scope of your organisation’s talent management strategy?

Overall Asia Europe North America

Individuals with the best leadership potential

34% 37% 43% 35%

Individuals with the best performance potential

34% 35% 39% 32%

The highest performers of the organisation

29% 35% 32% 27%

Current leadership28% 29% 31% 27%

The “marzipan layer” (level below current leadership)

23% 27% 23% 25%

Everyone in the organisation19% 23% 22% 19%

Individuals within areas of acute skills shortage

19% 20% 16% 17%

None of the above8% 5% 10% 8%

Table 12 Which of the following is the single biggest barrier to implementing or maintaining a formal talent management strategy in your organisation?

Overall Asia Europe North America

Difficulty measuring return on investment from talent management strategy

20% 23% 23% 26%

Lack of support from senior management

19% 18% 18% 18%

Lack of clarity about scope of strategy

19% 18% 16% 18%

Lack of human resources 17% 17% 14% 15%

Lack of financial resources 14% 12% 14% 13%

Concern among employees that strategy is “elitist”

8% 9% 11% 6%

www.stepstone.com

This haphazard approach, say experts, is nolonger adequate given that a company’s human capital is seen as an asset and, increasingly, as part of risk management. Only a minority of firms currently report to external stakeholders on talent management metrics (see table 13). However, although no jurisdiction has yet mandated that information on talent and leadership should be included in the annual operating financial review, the idea is beginning to take hold.

“In the annual reports it’s one of the biggest areas of risk people are building plans around,” says Linda Holbeche, research and policy director at the Chartered Institute of Personnel and Development. “Talent is more significant in many sectors than corporate reputation, and is definitely seen by many as the biggest risk in terms of the organisation being able to compete.”

So companies are paying attention – particularly when it comes to mission-critical staff. In our research, executives report that individuals with leadership potential (34%) as well as those with the best performance potential (34%) fall within the scope of their organisation’s talent management strategy.

Although other employees should certainly not be ignored, experts argue that the days when a one-size-fits-all approach could be used for developing a company’s human capital are over.

“Segmentation is going to become very important because you will have different requirements for mission-critical workforces than you will for services workforces,” says David Smith, managing director of Accenture’s Human Performance practice in North America. “Segmentation through modular choice, management practices and flexible policies is something organisations are stumbling their way through, and they’re not all getting through it at the speed they probably need to.”

And if companies are facing greater diversity in terms of the geographical sources of talent, their workforces are becoming increasingly complex as they try to manage generations ranging from Gen Y and school-leavers to older workers remaining in work beyond the official retirement age.

“Companies are encountering the complex issue of four generations in the workforce and in industry, we’ve never before seen four generations in the workforce,” says Mr Smith. “Managing that becomes quite challenging,”

Table 13 Which of the following metrics does your company report to external stakeholders? (%)

Employee turnover 21.8 %

Diversity measure 20.8 %

Employee satisfaction 19.1 %

Average salary 17.6 %

Employee productivity 13.7 %

Average length of service 11.5 %

Absenteeism rate 7.6 %

www.stepstone.com

Gen YThe generation of school-leavers now entering the workforce is the group that is providing companies with the greatest headaches when it comes to attracting, engaging and retaining promising employees.

This generation is racially and ethnically diverse. They are also extremely confident. Most agree that members of Gen Y, or the Millennials as they are also known, think and work in completely different ways from previous generations and have far higher expectations of what their employers are going to deliver in terms of career development.

For a start, these young workers are the first to have grown up with technology. They connect with friends and colleagues globally through virtual communities on social networking sites.

This has implications for companies trying to connect with these individuals. “The way they look for jobs is different,” says Lesley Uren, chief executive of Jackson Samuel, a UK-based talent management firm. “The old days of the graduate milk round are changing. New media have entered the arena and they are using networking and networking sites to find jobs. So it’s a very different dynamic, and organisations are only just coming to terms with what it will take to attract these people.”

As a result some companies are starting to communicate with Gen Y candidates through media channels with which they are familiar. Dow Chemical posts a large amount of material about the company on the Internet, along with web cams and podcasts. “We’re reaching out to the generation coming out of school in the way they’re used to getting information,” says Julie Fasone Holder, head of human resources at Dow Chemical.

Ernst & Young has gone a step further. In 2006 the firm launched a corporate page on Facebook. The site, which now has more than 10,000 members, is not used for direct recruiting or posting resumes, but for raising awareness of the firm’s brand among students and potential job candidates by allowing members of the site to exchange information among themselves.

And with the popularity of websites such as YouTube in mind, the firm is this year launching a video competition called “Reel Influence” for US and Canadian college students recruits, in which teams are asked to create compelling videos around the question “Why professional services?”

“More than any generation we’ve ever seen, these people put a lot of stock in the information that they can glean from each other,” says Dan Black, director of campus recruiting for the Americas at Ernst & Young. “So we felt the need to reach this group through a medium they are comfortable with.”

www.stepstone.com

At the same time, Gen Y job candidates are scrutinising more intensely than previous generations the values of the companies they are considering working for. Not only do they want to know that the salary and benefits match their expectations – they also want to be assured that they are working for a company whose ethical behaviour and policies on the environment and approach to society match their own philosophies.

“Talent management people can put out wonderful pieces about the organisation and how it develops talent but if you’re a young recruit or candidate, the first thing you’re going to do is Google the company,” says Prof Gratton. “So technology is changing things.”

Although in our survey results an image problem in an industry or company was cited by only 15% of respondents as hampering efforts to hire top candidates and by just 12% as impacting retention, recruitment specialists and talent directors believe that, for the generation now entering the workforce, the sustainability and ethical credentials of a company will be an important element in their choice of employer.

Companies are finding these candidates asking detailed questions about their community programmes or initiatives to reduce the carbon footprint of their operations. “Lots of organisations are being more forthright about their green policies and responsible citizenship,” says Ms Hahn. “It’s becoming almost a competitive edge issue.”

Older workersAt the other end of the generation scale, more workers are staying in their jobs beyond retirement age. In Europe, the age discrimination legislation now in place means employers are unable to force staff to retire on age grounds below 65 and have a duty to consider requests to work beyond 65. The challenge for companies, therefore, is to engage these workers who, like Gen Y, may also be looking for greater flexibility in their work patterns and an opportunity to give back to society.

In our survey, only 10% of executives see an aging population as fuelling talent shortages in their organisation while 31% of respondents see increased use of older workers as beneficial to their organisation’s ability to recruit talented individuals.

However, these employees need to be offered a range of options to keep them engaged at a time in their careers when marching upwards through the company may no longer possible and their career structures, rather than being vertical, are horizontal. These employees want to work longer, but on their own terms, often in a consulting role.

“There’s a lot of talent in the older age group and a lot of people want to do portfolio type working where they go to work two or three days a week and then do something else,” says Mr Jukes. “We’re seeing they have great skills to offer, particularly in the advisory services. Professional services firms have had far too young retirement ages and we’ll all be reviewing that now.”

www.stepstone.com

Inside or outWhile internal development programmes are seen as a crucial part of employee engagement and succession planning, the departure of retiring leaders as well as rapid changes in certain industries mean organisations will also need to bring in individuals from outside to fill talent gaps. Almost half (46%) of respondents to our survey cite the use of headhunters or recruitment consultants as among the strategies their organisation is likely to use when gaining access to new pools of talent (see table 7).

Part of the reason for this is that, in many industries, the pace of change is such that organisations cannot rely on bringing employees in at a junior level and developing their skills inside the company.

“Where there is significant change in an industry, a firm’s needs may change radically in a two to three year period,” says Mr Guthridge. “And in those environments, if you’re developing someone over a ten-year career journey, it’s likely they’ll get to senior levels in the organisation without the necessary capabilities because everything has changed by the time they get there.”

Another reason to turn to external recruitment firms is when companies are expanding into new product or services areas and need to increase rapidly the number of senior managers with expertise in those areas.

At Cisco Systems, as the company moves into software and consumer markets more aggressively, the organisation is looking to bring in talent from outside, increasing the proportion of senior leaders hired externally from 20% currently to a target of 40%. “That’s not to say we won’t continue to develop talent inside,” says Annmarie Neal, vice-president of talent management at Cisco. “But we want to stretch out the newness of our thinking by bringing in a lot of talent from outside.”

For Royal Bank of Scotland, the solution was to establish its own in-house executive search function to co-ordinate recruitment, conducting executive-level searches across the globe. “We’ve used and continue to use external firms, but we also thought this would give us an extra capability internally, greater flexibility and the ability to build and retain our own knowledge base,” says Mr May. “It enables us to keep an eye on the market when we review areas such as succession planning. So we are doing research as well as specific searches.”

Nevertheless, the large number of employees retiring over the next few years will present companies with a challenge. In the US alone, 75m employees will be eligible for retirement, with only 45m workers to replace them, according to research conducted by Hay Group with Chief Executive Magazine.

This means companies will soon be losing large numbers of employees with

well-developed leadership skills. Hay Group’s research shows that the retiring population has four key abilities – team leadership, organisational awareness, impact and influence, and initiative. “These competencies take longer to develop and come from experience and maturity,” says Mr Lash. “The implication is that organisations will need to find ways to rapidly accelerate the growth of these abilities in younger talent.”

www.stepstone.com

Another option is to use a company-branded recruitment portal. In our survey 37% of executives said that they had used them to overcome recruitment difficulties (see table 2). At their most basic, recruitment portals can serve as an obvious first port-of-call for anyone interested in working for a particular company. They can also be a good way for companies to promote their culture to applicants. However, to be truly effective, they also need to incorporate software that enables a business to pool all applicant data across different regions and divisions within the company. At the communications company Orange, for example, introducing a careers portal enabled them to centralise 80,000 CVs and made tracking candidates easier. The company says that it has even helped them recruit highly experienced executives, who would normally have been recruited through an executive search firm. A happy by-product of this has seen Orange cut its yearly spending on recruitment by £1.1m.

When it comes to staff development, although much has been made of e-learning and professional training in recent years, our research indicates that on-the-job learning, coaching and mentoring are emerging as the most powerful tools being used by companies to foster skills and retain their employees.

The largest group of respondents (66%) cited on-the-job training as a method used by their organisation to develop talent, while 58% cited coaching and 47% cited mentoring.

Moreover, new forms of mentoring are emerging. At IBM a junior employee, sometimes even a brand new hire, will become a mentor for a senior-level executive. The idea behind reverse mentoring, says Karen Calo, vice-president of global talent at IBM,

is to close the experience gap and erode generational differences by putting both executives on equal ground.

“What’s great about reverse mentoring is it helps people think differently,” says Ms Calo. “You can impart the wisdom of time and experience and they help you think about what the next generation is excited about.”

IBM is also taking mentoring into virtual reality on Second Life, the 3D online virtual world. There, the avatars – the online personae created to navigate the site – of the mentor and mentee meet in an environment that helps break down cultural and geographic barriers.

As companies lose older employees in leadership positions, companies will have to use these tools more frequently to accelerate the development of younger executives and expose high-potential leaders to stretching tasks and positions.

“I think the most powerful development comes not from development programmes but from on-the-job opportunity,” says Katherine Thomas, BT’s group talent director. “So a lot of our talent agenda is about deploying people rapidly to the right kind of opportunities.”

Mr Lash believes that these kinds of strategies will be what companies need to focus on in order to mitigate what he calls the “looming talent crisis” arising from the numbers of the senior leaders retiring in the coming years. “Using older workers as mentors and coaches earlier in their careers will be critical,” he explains. “Organisations that can put in place the systems and support to make this happen will be able to fill their talent pipeline more quickly to meet the leadership gaps they will face in the next five to ten years.”

www.stepstone.com

Tracking itIn order to assess where the greatest talent gaps are likely to lie, companies need to track their workforce closely. Our research shows that the most common indicator tracked by companies is employee turnover, identified by 65% of respondents. Equally prominent in the results is the absenteeism rate (64%).

When it comes to performance management, peer review and 360-degree assessment are techniques that have received a lot of attention in recent years. However, in our research only 26% executives cited 360-degree appraisal as a tool used by their organisation to track employee performance while just 14% highlighted peer appraisal. By far the largest group of respondents (68%) cited the annual individual employee assessment as the method used by their organisation to track this.

However, experts suggest that numbers are only part of the picture and that companies need to look closely at how employees previously identified as having high potential have actually performed.

“It’s about going back every so often and having a look to get a better sense of what talent is needed for the future,” says Ms Holbeche. “And companies should be looking at the people who have come through and delivered and how they differ from those that haven’t come through – rather than just getting everyone ticking the boxes.”

At KPMG, an extensive tracking system monitors key performance indicators such as turnover by level, gender and number, days spent on learning and development, number of incoming recruits coming in and the percentage of those recruits that came from the first offer. However, the firm also monitors employee engagement and tracks this globally.

Mr Jukes says that a healthy competition between national practices helps keep the focus on levels of employee engagement and allows remedial programmes to be put in place when scores slip. “There’s a lot of pride in peer pressure between the countries on engagement scores, which is good,” he says.

Another challenge for companies with operations in different countries is establishing a common language through which to ensure that the organisation is keeping its skills in line with business requirements. To do so, IBM has developed an “Expertise Taxonomy” system that defines terms for certain skills and roles so that they have consistent meaning across its operations globally.

The company uses this in conjunction with its Professional Marketplace tool, through which employees regularly update their skills and engagements on a web-based database. “That’s a huge competitive advantage for the company,” says Ms Calo. “Because we know what all our capabilities are and when they’re available.”

www.stepstone.com

Rising up the agendaAs a result of the complex economic, social and demographic shifts now taking place, talent management is moving up the agenda, with many companies citing this as a board-level issue, and one that is seen more broadly as part of risk management. The largest group of respondents to our questionnaire (26%) say that responsibility for this part of their organisation’s business is in the hands of the chief executive (see table 10).

“It’s valued [at senior level],” says Mr Jukes. “Because essentially our biggest strategic issue is not having the right people in the right place and right time so people management has risen to the top of the list.”

Increasingly, talent management is in the hands not of the human resources director but executives with titles such as “vice-president of talent management” or “chief talent officer”, newly emerging positions that many believe will – like the chief information officer during the 1990s – become an increasingly powerful executive post in the corporate organisational hierarchy.

“The way we manage talent in BT, this is actually one of the small number of areas in the overall HR that is reported on regularly to the PLC board,” says Ms Thomas. “I go twice annually to the board with updates on the whole agenda and, in addition, I spend time with the operating committee. So this is something that definitely has board visibility.”

In many organisations talent management is no longer viewed as an HR issue but as an enterprise-level issue that requires the attention of senior executives. And while HR departments provide the support, tools and guidelines needed to roll out leadership development and performance management programmes, the person with responsibility for shaping and driving these programmes is increasingly the line manager.

“Companies no longer see a separation between talent strategy and business strategy,” says Mr Guthridge. “So that means management, particularly senior executives and the chief executive, should be seen as the chief talent officers in any organisation.”

www.stepstone.com

Conclusion As the world’s talent pools become more global, companies are faced with a complex set of demographic scenarios that will affect their skills acquisition. In addition, they need to respond to changing expectations from a workforce that is looking for greater flexibility, challenging career opportunities and the chance to work overseas.

With a number of employees destined to retire in the coming years, companies are likely to experience severe shortages of talent at senior leadership levels. At the same time, the ambitiousness, ethical consciousness, global aspirations and technical literacy of Gen Y candidates mean organisations need to devise ways of attracting and retaining this new generation now entering the workforce.

Although our survey shows that companies see the expansion of non-traditional talent pools in regions such as Asia-Pacific as a beneficial trend when it comes to hiring skilled employees, many executives believe that the general acquisition of talented staff is becoming much more difficult.

Given these challenges our survey reveals the surprising fact that many businesses have yet to establish a formal talent management strategy. Even in organisations that have established a strategy, it is only an informal one, often lacking clarity of scope. Moreover, according to respondents, talent strategies frequently do not receive senior management support.

Yet industry commentators and professional advisors say it is essential that talent management be viewed as an integral part of a company’s overall business plan – something that receives board attention and that is included in risk management considerations.

The challenge for companies, therefore, is to establish programmes and strategies – supported by senior management and rolled out by line managers in local business units – that will turn talent management into a systematic, measurable process, guaranteeing the pipeline of skills and appropriate leadership needed for them to remain competitive.