The talent forecast: build it or buy it?

by 25 Jul 2007

Talent management is the process of estimating the human capital needs of an organisation and then going about meeting those needs. Melissa Yen speaks with Peter Cappelli about the big challenge facing talent management uncertainty and the financial implications of it

It’s well-established that effective management of key talent is crucial in today’s tight labour market. But to what extent should existing talent be actually managed? Would it be easier to simply seek it elsewhere? Considering the future needs of your organisation is vital to answering these questions, according to Peter Cappelli, professor of management and director of the Center for Human Resources at the Wharton School, University of Pennsylvania.

Capelli believes it is time for a change in practice. Curiosity surrounding how companies were managing careers following the breakdown of lifetime employment is what prompted Cappelli’s research into the area and the subsequent development of his forthcoming book, Talent on Demand.

According to Cappelli, discussion at conferences and within ‘best practice’ literature focuses on how employers should manage talent and careers as if nothing has changed. They are still talking about succession planning, rotational assignments, and long-term development plans. “I started to get a sense that virtually no one was actually doing these things, with the exception of a few of the very large corporations that had never abandoned them,” he says. “So I tried to see what, if anything, companies were really doing that was new, and then to think about what they should do if they were to look at the challenge of talent management directly.”

The big issue for talent management, indeed for all management, is to help the organisation meet it’s goals. As a result, Cappelli began by investigating how talent management could do better in this regard. He discovered that the biggest challenge lies in trying to address uncertainty with respect to business demands and the internal supply of talent.

Best practice?

Cappelli recommends organisations forget about best practice literature – which is mainly about the best way to teach people work skills – and begin instead with an assessment of their own organisation’s business needs.

“Virtually all of that literature focuses on internal development practices, yet the evidence suggests that most positions now are filled through outside hires. Recruitment software company Taleo, which manages job filling for a large number of Fortune 500 companies, reports that about three- quarters of all vacancies are filled from outside,” he says.

Organisations now need to find the right balance between outside hiring and internal development to succeed. And that balance depends on which approach is going to be more costly, Cappelli says.

The big challenge for HR is to get just the right amount of human capital to meet the employer’s needs, neither falling short nor going long. Furthermore, the balance between ‘make or buy’ helps make that match, but beyond that, employers need to design internal development practices in ways that reduce the risk of error in forecasting and delivering needs, he says.

Following this, HR must then structure the development experiences and investments to ensure that they can earn a return from them. “The financial problem facing internal development is that the investments can’t be recouped, first, if the demand for the competencies turns out not to be there, and second, if the employees leave. Managing those two problems requires some careful designs,” he adds.

Planning for the future

The trap for employers is in constantly worrying about talent shortages, without actually doing anything about it. This is because employers don’t know what to do, Cappelli says. “They are burned out by the cost of outside hiring, and they are reluctant to develop talent internally for fear of losing it.”

The biggest financial issue is how to make investments in internal development pay off, and the biggest risk in doing so occurs if the talent is not required or leaves the organisation.

If HR and employers are to forecast their talent demands successfully, the less detail provided the better.

“The most interesting examples I’ve seen,” Cappelli says, “ are employers who have given up trying to make detailed forecasts because the results of such forecasts turn out to be so poor.” For Cappelli, a bad forecast is worse than no forecast at all because it requires investments and commitments that are sunk and lost when the forecast turns out to be wrong.

“Here, I see two interesting developments. The first is a move away from forecasts toward simulations. The latter allows line managers to see what would be required in terms of human capital to achieve various business outcomes. This means managers can then see what they are getting into before they do it.”

The second interesting process, Cappelli notes, revolves around developing systems for delivering talent that are responsive to changing conditions. “What this requires is a move away from very detailed planning toward much more general plans; development of talent that is shorter-term and easy to adjust; and arrangements that reduce the investments that have to be recouped

Striking a balance

In striking the right balance between 'make' versus 'buy' when it comes to talent management, Peter Cappelli suggests the following questions and points be considered:

How long will you need the talent? The longer one needs the talent, the easier it will be to make investments in internal development pay off.

Is there a hierarchy of skills and jobs that can make it possible for candidates without the requisite competencies to learn them through internal development? The more this is the case (particularly likely within functional areas), the easier it will be to develop talent internally.

How important is it to maintain the organisation's current culture? Especially at the senior level, outside hiring brings in individuals with different norms and values, changing the culture. If it is important to change the culture, then outside hiring will do that. While outside hiring brings change, it may not always be easy to predict what that change will be, especially if several outside hires are brought in at the same time.

How accurate is your forecast of demand? How long can you be sure that you will need the talent? The less certainty about the forecast, the greater the risk and cost of internal development.