Human capital: The state of play in Australia

by 09 Aug 2005

Australian organisations are unique in the way they manage human capital with both positive and negative outcomes. Craig Donaldson speaks with IBMs Asia-Pacific Leader for Human Capital Management, Bill Farrell, about whether Australian HR processes require a re-think or a move to next generation HR methods

IBM Business Consulting Services recently conducted its annual Global Human Capital Study, encompassing 320 organisations and 106 chief HR officers worldwide – 29 of which were based in the Asia Pacific. It found global organisations in more mature markets risked becoming unresponsive to the needs of their workforce. However, local organisations were generally ahead of the trend in their implementation of human capital management (HCM) processes and practices.

“Yes, we are efficient and ahead of the curve in terms of how we manage the HR transactions, but some of the results show that while we’ve focused on efficiency, we need to focus next on the effectiveness of the HR function,”says Farrell. One particular area where organisations fell down, when compared to the US, was in the area of workforce management. Being able to predict the demand for labour and how to supply it, in terms of both numbers and competency sets of employees, is a newer area for HR functions across the region.

“It’s about getting the HR function focused on those issues,” Farrell explains. “If you look at US organisations, over the past two or three years they’ve really started to focused on the next state of the HR delivery, which is about business transformation outsourcing. Once they’ve rid themselves of the administrative workload of HR, they move up to the value add around workforce management.”

Farrell said Australian organisations are probably a couple of years away before they really feel comfortable about addressing issues around workforce and talent management. This will be a particular challenge, he predicts. “There has to be a much more cohesive effort across the business on talent management. It’s not HR’s job to facilitate and lead it, but it’s also the CEO’s responsibility to ensure that talent, talent acquisition and retention are key to an organisation’s success.”

The turnover downfall

Despite being a leader in efficient HR methods, Australian organisations have real trouble in retaining their best and brightest employees and executives. Current market forces have led to the Asia Pacific region having the highest voluntary turnover at senior and middle management in the world, and Australia closely follows that trend, costing organisations in both dollars and IP.

While Australia rated well in terms of recruitment and management development, Farrell said talent retention was an issue in Australia due to the colliding worlds of skills shortages, double digit growth in the executive search industry, huge gaps in talent availability and sometimes fierce overseas competition for Australian talent.

“I think HR is aware of the whole retention problem, but I’m not sure if organisations are really developing the practices needed to be able to tackle it in the right way. Those organisations which are really very profitable have certain practices which allow them to retain their people,” Farrell says. “This gets into that whole philosophy of the build versus buy issue, which was prominent in the study.”

Specific organisations do either one or the other, but the study found the challenge is getting the balance right. If organisations choose to build talent, Farrell says, they need to invest in training to improve their profit and create opportunities for executives through processes like succession planning. On the other hand, if organisations choose to buy, they really need to get the skill set and cultural fit right.

Organisations which choose to build talent and invest in management development programs for executives can find the exercise very expensive if they’re unable to retain talent, Farrell adds. “If they get the skills that are in market demand and they leave the organisation, that can prove very, very costly.”Australia requires next generation HCM strategies that clearly address issues of succession planning and executive retention. Otherwise, the repercussions could be dire for local companies trying to gain ground against global competitors, he said.

The Global Human Capital Study also found organisations across Australia and New Zealand had the lowest rates of job offer acceptance –“down around 50 per cent, which is very low compared to the rest of the world”, Farrell says. “That basically means that one out of every two job offers gets knocked back. So, are Australian companies really focused on the outcomes of their processes, are they just focused on process for process sake?”

HR leadership in mature markets

The IBM study raises a number of key questions. Are current global best practices in HCM simply not sufficient in Australia? Do Australia’s unique market forces require a re-think of HR processes or a move up the value chain to next generation HR methods? Are the answers to be found in other mature market economies or the new world?

While many Australian organisations are part of a mature market, Farrell says many HR functions are deficient and focus on the HR process itself, presenting a great opportunity for heads of HR in Australian organisations to demonstrate leadership around interventions that really help their organisations compete and grow. “The gap is in how you develop interventions or practices that address issues,” he asserts.

There is significant room for improvement around the whole concept of workforce management – managing the human capital of an organisation as opposed to managing the human capital function, according to Farrell. Many Australian organisations struggle to effectively quantify the return on their human capital programs.

“We thought that, in that particular area of measurement, we’d see a lot greater usage of measures. What we actually saw was less than 50 per cent of organisations actually measure the return on their human capital programs, and less than 40 per cent of corporates use metrics which reflect people performance,” he says. The study also found that less than a quarter (22 per cent) of organisations can demonstrate the benefits from the human capital management tools they use.

“We see even HR professionals not getting as measured as much as they should be around their own projects and interventions for the business. For example, if you see the head of learning develop a new program, are they actually being measured on the outputs of that program in terms of the business value that’s added? This link between their own performance and individual pay is not happening. Even though HR professionals are saying they want to take leadership positions, I think they need to think about how are they going to do that and how are they going to be objectively measured on those interventions,” Farrell states.

Repercussions for companies

If HR professionals are unable to step up to the plate and focus on delivering business outcomes, there may be a number of consequences for their companies. Particularly amid greater market globalisation. The aforementioned issue of talent management is one in which Australian companies could suffer significantly not only internally but externally.

“The market will look to those companies and whether they have the talent in the market to grow and be competitive,” Farrell says. “There’s examples of that coming up all the time.” He points to instances where the share price of financial services organisations has stalled due to a lack of clarity around chief talent within the organisations. Due to a lack of internal measurements around human capital, this makes it hard for companies to report to the markets and investors on such issues, he adds.

“We’re going to see much more focus on hard measures around succession planning, performance of individuals and the whole issue of performance based pay,” Farrell says. He argues the concept of triple bottom line reporting should include things around people measures, and predicts harder measures around profit per employee – noting a vast difference between profit per employee across some of the well known and more competitive household name brands in Australia.

“HR has really stood up and said, ‘OK. We’re going to change,’” Farrell states. “And they have changed in terms of being more efficient, but the trick is now once the HR function has become more efficient, where are they going to provide value to the organisation? It’s a great time to be a head of HR because of the challenges organisations face around the lack of talent and the war for talent. But if I was a CEO, I would be looking to my HR function and saying, ‘OK, we’ve got these challenges in the market, what are you going to bring me in terms of the next generation HR processes? That’s what it’s going to take.”

This will require a new way of looking at HR, and the human capital component more specifically, according to Farrell: “Let’s not focus on the HR process for process’ sake, but let’s focus on how we can improve productivity across our workforce.”

Farrell notes that some of the observations from the study for organisations across Australia and New Zealand are a kind of paradox. On the one hand, Australian companies are in a mature market, but on the other, they’re presented with high growth opportunities. Companies have got to manage the balance between the HR function per se and really enabling the business to be more competitive, not only across Australia but across the Asia Pacific. “The competition for people is becoming global. If we don’t get it right now it’s going to become more and more difficult in terms of talent management over the next few years.”

Key findings for Asia-Pacific organisations

Asia Pacific organisations (excluding Japan) have the highest:

• Voluntary turnover at the senior and middle management levels

• Use of reporting number of candidates per position for new hires

• Percentage of companies offering management development programs

• Percentage of companies with a learning strategy

• Flexibility in proactively staffing prior to market demand

• Use of measures of employee satisfaction, attraction/retention of key staff and growth of key staff in leadership compensation

They are more likely to:

• Evaluate the quality of new joiners as part of the performance measures of recruitment

• Evaluate employee performance on the responsibilities of the role

• Have individual pay arrangements

• Have learning strategy aligned with business objectives

They are less likely to:

• Have a management leadership development program

The IBM Global Human Capital Study methodology

A total of 320 organisations participated in the study, across the communications, distribution, financial, industrial and public sectors. Each sector had a similar breakdown of workforce in terms of number of staff, middle and senior management. One hundred and six chief HR officers were interviewed, based in Asia Pacific, Europe, North America and Latin America, Insights from a number of recent IBM studies were incorporated into the findings. Organisations that provided results ranged in size from less than 1,200 employees to more than 25,000. Organisations included headquarters for global operations, independent operations, manufacturing units and subsidiaries of parent companies operating in other countries. The study was designed, executed and analysed by the IBM Business Consulting Services Human Capital Management Practice.

Source: The IBM Global Human Capital Study 2005