Game-changing: Financial Analysts Begin Assessing Talent Management Effectiveness

With access to and leverage of talent playing a more critical role in an organization’s ability to succeed than ever before, it should come as no surprise that the financial analyst community would start evaluating talent management capability when rating organizations. The fact that analysts historically haven’t paid much attention to factors like an organization’s ability to recruit, develop, or retain top talent has allowed HR to operate pretty much “under the radar,” without standardized analytics.

The OMG moment for talent management leaders is coming.

Financial analysts and executives have finally begun to make the connection between excellent talent management practices and profitability. More and more of the financial powers that be are considering making talent-management-effectiveness assessments mandatory. When the interest rate your organization gets on a major line of credit is influenced by your talent management effectiveness, you can bet the degree of scrutiny from both internal and external leaders will change the game.

The Power of Financial Analysts

Ratings by key financial analysts can make or break a company. If an influential stock or bond analyst gives your firm a positive or negative rating, your stock price can change by double-digit percentages almost instantaneously. Moreover, because evaluations by financial analysts can come without warning, you can make a strong argument that the CEOs of large public corporations fear the wrath of external financial analysts even more than they fear irate stockholders and auditors. It should be clear to the leader of any business function or unit that if their unit is negatively cited in an external financial analyst’s report, that the leader and the function are both guaranteed to bear the wrath of the entire executive team.

Moody’s Begins the Change

Moody’s is an internationally known corporate bond rating service. Its bond rating can dramatically impact the cost of corporate credit. In a recent report on the outlook for the healthcare industry and the primary factors that contributed to profitability, Moody’s made a direct connection between financial performance and success in the talent management areas of recruiting and retention. Lisa Goldstein of Moody’s wrote that an effective strategy focusing on quality could:

“result in improved market share, better ability to recruit and retain physicians, lower nursing vacancy/turnover rates, improved financial performance…”

This statement clearly connects recruiting and retention with organizational performance in both market share and financial performance. In this report, Moody’s also cites the importance of additional talent management functions, including leadership development, training, and benchmarking best practices. Moody’s has made it clear that these types of factors will now influence its bond ratings. Given the widespread exposure that this report generated (it was highlighted in a Forbes article) talent management leaders in other industries can now expect their executives and an increasing number of financial analysts to increase their scrutiny and raise their expectations for the talent management function.

Google Also Connects Talent Management and Business Success

In addition to financial analysts, Google has taken the lead in making shareholders aware of the importance of talent management. For example, as early as 2004 and continuing up until the present day, Google has in its SEC legal filings been clearly stating the direct connection between talent management and company success. For example, in its June 2007 filing, it stated that “We believe that our approach to hiring has significantly contributed to our success to date.” It also included this important statement under the “risks” section: “If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively.”

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Additional Connections Between Talent Management and Business Success

Although no individual firm has yet to make the direct connection between its talent management success and improvements in its stock price, analysts have shown that there is a connection. For example, researchers at the consulting firm Watson Wyatt using its human capital index found that good people practices can increase a company’s value by as much as 30%. Russell Investments reports that firms on the Fortune “100 Best Companies to Work for” list outperform the S&P 500 and the Russell 3000 by as much as 10%.

Risk Management and Workforce Planning Collide

Workforce planning has been a key practice in best-practice organizations for some time, but despite years of continuous improvement, most organizations have had less than stellar success linking such efforts to the business. Outside the HR function, more and more organizations are realizing that lack of capability or lack of effectiveness in talent management produces risk to the organization. Furthermore, actuaries in risk management know how to model such risk and peg potential dollar-impact assessments to each. ERE Excellence Award winner Dan Hilbert has been working on tools that help organizations better merge workforce planning, financially focused headcount planning, and workforce risk management for several years. The response to the tools he has architected as CEO and Founder of OrcaEyes is stellar when the audience is made up of finance, operations, and risk professionals, but not so much with traditional HR professionals who struggle to comprehend the depth of analysis. What is easy to predict is that risk modeling will become a standard practice, but that HR may not be the driver!

Action Steps

If you are a talent management leader who wants to be proactive, strategic, and demonstrate a commitment to enabling/driving the business, don’t delay action until this external assessment trend hits you in the face. Instead, consider it as an opportunity to show off the results that you have worked so hard to produce. Some action steps that I would recommend include:

  • Start by putting together a team of financial and metrics experts in order to prepare for this added visibility and scrutiny.
  • Develop a set of workforce productivity metrics, starting with revenue per employee but escalating to the ratio of the dollars of labor costs to dollars of corporate profit.
  • Develop a set of correlations between improved results in recruiting, retention, development, etc. and increases in business results, including sales, customer satisfaction, and product quality.
  • Learn how to convert your talent management results into their impact on corporate revenues. For example, reporting a 5% decrease in turnover just does not have the same impact as reporting the fact that the 5% decrease resulted in a $3.2 million increase in revenues.
  • Develop a methodology and approach that allows you to prepare for and to successfully respond to analysts questions and inquiries.

Final Thoughts

At many firms, the largest single variable expense is employee cost. Because it is such a large expense item, it must provide a positive return on investment. Unfortunately, many HR leaders have been reluctant to even calculate their return on employee costs. If what many predict will happen does happen, very soon you will have no choice but to calculate such metrics and suffer public scrutiny. Depending on how your results rank, that could be a great day, or alternatively, it may be your last day.

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

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12 Comments on “Game-changing: Financial Analysts Begin Assessing Talent Management Effectiveness

  1. Corporate HR executives and leaders should be leading this charge and have had the information to do so for a long time. Some of the best already have made the link of talent management, succession, and profitability.
    However, there are so many who don’t do this or will resist it at every opportunity.

    For years, I’ve been advocating that all direct contributing functions to Talent Management and Succession are, in fact, true HR while other traditional components are actually operations. That’s not popular because it reduces the traditional scope of HR to whatever it takes to make the company run better as a result of employee accomplishments.

    Benefits? Compensation? Payroll? Other departments that have an operational cost-centric core aren’t the HR of today and tomorrow.

    Game-changing reporting overemphasizes the data though. The real game-changing takes place in practices, systems, and mindsets that build companies around the talents of its workforce and what they can do better than anyone else. Companies are still stuck trying to get people to conform too much, but stagnate or declining profitability will create the converts – not the reports from analysts themselves.

  2. @ Dr. Sullivan: I strongly support your ongoing desire to have recruiting based on metrics, as long as we don’t have to be the ones collecting, entering, or analyzing the data.
    IMHO, let recruiters recruit:
    Give us the tools (a quiet place to phone and use a computer) and support (a loyal and powerful backer) we need to do our jobs, and don’t have us sweat the small stuff (aka: “Most tasks besides getting/helping improve putting butts in chairs as quickly, efficiently, and affordably as possible”).

    @Darryl: well-said.

    Cheers,

    KH

  3. It’s good to hear of someone like Moody’s picking this up. On a few occasions over the last 12-24 months I’ve been speaking to equity analysts about how to identify internal metrics from outside, and what questions to ask on calls. There is a genuine interest out there.

    Human Capital Reporting has probably been on the agenda for 10 years or so with organizations like the CIPD in the UK picking it up and several big corporates have measures in annual reports. The point that I agree is that risk type issues have been of a lower priority.

    HR’s big issue in this regards is that whilst employees are measured on the cost side in financial terms, on the value side measures tend to be subjective. We desperately need to be talking in terms on net value added.

    Ultimately correlating HR activities to fiscal performance isn’t an exact science. I explain it in terms of predicting national economic performance where even the best experts with masses of data can have diverging predictions. The fact that it’s not easy shouldn’t be a reason not to try.

  4. Are we talking about the bond rating outfits about whom former Labor Secretary Robert Reich said:

    (http://marketplace.publicradio.org/display/web/2007/10/24/dont_pay_for_subprime_conflict_of_interest/)
    “Credit-rating agencies are paid by the same institutions that package and sell the securities the agencies are rating. If an investment bank doesn’t like the rating, it doesn’t have to pay for it. And even if it likes the rating, it pays only after the security is sold.

    Get it? It’s as if movie studios hired film critics to review their movies, and paid them only if the reviews were positive enough to get lots of people to see the movie.”

    Sounds like these are the folks who oversaw a loss of trillions of dolars and millions of jobs to our economy.
    Do we want to prove our worth to THESE folks?

    Cheers,

    Keith Halperin

  5. I don’t mean to be impolitic, but Moody’s should have gotten the death penalty. Andersen was debatable, but not those people.

    http://www.nytimes.com/2010/09/27/business/27ratings.html?partner=rss&emc=rss

    That’s the New York Times reporting on a congressional hearing, not some fringe blog.

    Now to have them rating anything else, and then depend on those ratings? Pathetic. But it will happen, and when it does, maybe it’s another push for the end of HR as we know it. COO will get HR processes and onboarding, Marketing will get recruitng, and hopefully the CEO’s office will get HCM.

    Keith, we seem to chew a lot of the same threads and think on the same lines- you beat me to this punch !

  6. John:

    Performing Financial Analyses on Recruitment Marketing solutions will bring more effective solutions to the market space. Many old school vendors will become irrelevant if they can’t show real value to the Employer and this is a good thing (and likely, given the lack of financial oversight within HR where decisions are made if they “feel good”).

    In HR & Recruitment Marketing: ROI is known as Return on Interest (did the vendor solution implemented make me feel good?) as opposed to Return on Investment (did the vendor solution implemented make financial sense for our company?). Financial oversight is a good thing and can only benefit HR. At Cachinko (where I work), we provide a basic ROI calculator on our website that shows how an Employer can generate a positive ROI taking into account their job board spend, staffing firm spend, and employee referral costs. We provide a very detailed 2-page ROI for those customers that want hard core details – we are not afraid to provide because we can walk the talk. I encourage all vendors to do something similar in an effort to help HR perform a financial analysis (advanced cost/benefit) on each Recruitment Marketing solution they’d like to consider.

    Executive leaders in HR & Recruitment Marketing that don’t embrace financial oversight and make significant changes (not “more of the same”) will be replaced more capable leaders that understand how to run a business. Evolution may take time, but it happens. Good article.

    -Felipe

  7. @Martin: Thank you, I appreciate it. Once again we see that great minds think alike! 😉 Also, Dr. Sullivan’s columns bring out the best in us.

    @Felipe:
    “Performing Financial Analyses on Recruitment Marketing solutions will bring more effective solutions to the market space.”

    Keith:
    Maybe, maybe not. It will give more work for someone to do; it should not be more work for the recruiters. Also, it will allow various corporate groups to design the analyses to show what furthers their interests- can you imagine an analysis being given much credence which shows the hiring process advocated by the founders and senior executives is highly inefficient and has cost the company greatly? Finally, has it occurred to anyone that though we may moan and groan about the inefficiencies and dysfunctions in recruiting organizations, many of us would be gone if those inefficiencies and dysfunctions were corrected? It’s important to recognize that in virtually any given situation (however bad), somebody benefits, and it may be you…

    Cheers,

    Keith
    keithsrj@sbcglobal.net

  8. @Keith: many of us would be gone if those inefficiencies and dysfunctions were corrected?

    Keith: That is the whole point. Financial oversight is a catalyst for evolution. If people enrich themeselves professionally to better their company and embrace positive change as a result of financial oversight, then they keep their job. The others that don’t embrace Financial Overisght in HR & Recruitment Marketing will find themseleves without a job at that company.

    You must be a good steward of company resources, the alternative is not an option to be considered – plain & simple.

    Keith: Thanks for your feedback. I like the conversation.

  9. @Felipe:

    You’re very welcome. I appreciate your comments, too. ISTM that one person’s positive change is another person’s worst nightmare, unles of course if the first person is one of my corporate superiors, in which case “It’s all good, all the time!” to bring back a seriously worn-out phrase.

    As I discussed last week with Lou Adler:
    Lou:
    Become an innovator and early adopter for every new idea that comes up.
    Keith:
    I believe that PT Barnum antedated Geoffrey Moore re: early adopters:
    “There’s one born every minute.”
    If you do this, you’ll help with the organizational churn, as you’ll probably be out pounding the pavement. By and large, it is better in a corporate setting to figure out what is going to work/who’s going to win, and then take credit for your decision while appearing to have been a strong/loyal supporter all along.
    ………………………………………….
    It has been my experience that beneath a thin veneer of pragmatic rationalism, what really drives recruiting (and also business as a whole) is what I call the “GAFI Principles”: Greed, Arrogance, Fear, and Ignorance/Incompetence/Inefficiency which are often much more powerful than the objective facts. ISTM that instead of decrying a world where such is the case, we should be aware of it and use it accomplish good ends, similar to how a aikido expert uses his/her opponents moves against them, without directly opposing. My final point is: if you want to change something in an organizational setting, it’s best to have some powerful allies and/or be a master persuader. Otherwise: out you go…..

    Cheers,

    Keith

  10. The key point I would like all who find this article of interest to take away is the “Game Changing” message.

    We have now reached finance, risk management, investment banking with this risk data. We have yet to run into a single leader or analyst in these areas who does not support a risk based view of HCM, especially in light of the sweeping new Board Risk regs passed by the SEC which redefine risk and Board members responsibility therein.

    There’s much more that I cannot divulge at this time for competitive reasons. An enormous amount of momentum and action is occurring in these powerful business areas and groups. Within a year to 2 years, HR will be faced with this strategic business change. This creates enormous opportunities for HR leaders and departments that empower strategic HC-Business Risk Management. It also creates enormous risk for those that can’t.

    As Dr. John said, this is Game Changing for the HR function.

  11. Outstanding discussion board!

    Dan, it is encouraging to hear you say that you are encountering business leaders who support talent management business intelligence data analysis. A good financial analyst will evaluate a company management’s resource utilization, especially its employees. I believe that this is an essential component of an analyst’s nonsystematic risk assessment. Internally, business leaders should conduct continuous assessments of performance of its operations AND its personnel at all levels. In my opinion, the executive team in every organization must align Finance and HR, and these two departments should be tackling this objective together.

    I keep hearing HR leaders complain that they have been trying to “get a seat at the table for decades.” I have heard and read this cliché over and over again in many different contexts. In this case I say, “What are you waiting for? Take your seat already!” Do not wait to be given a seat at the table, take a seat. Acknowledge the importance of what we are debating in discussion board posts such as this one and commit to making a difference in your company’s talent acquisition/management program(s). Be mindful, however, that the consequences of taking your rightful seat at this table means that you are accepting your new decision-making role and accountability for the quantitative (financial) performance metrics that goes along with it.

    -Tony

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