BCG-Realizing the value of people Management.pdf

8/14/2019 BCG-Realizing the value of people Management.pdf

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From Capability to Pro tabilityRealizing the Value of People Management


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The Boston Consulting Group (BCG) is aglobal management consulting rm andthe worlds leading advisor on business

strategy. We partner with clients from theprivate, public, and not-for-pro t sectorsin all regions to identify their highest-value opportunities, address their mostcritical challenges, and transform theirenterprises. Our customized approachcombines deep insight into the dynamicsof companies and markets with closecollaboration at all levels of the clientorganization. This ensures that our clientsachieve sustainable competitive advan-tage, build more capable organizations,

and secure lasting results. Founded in1963, BCG is a private company with 77offi ces in 42 countries. For more informa-tion, please visit bcg.com.

The World Federation of People Manage-ment Associations (WFPMA) is a globalnetwork of professionals in people manage-

ment. It was founded in 1976 to aid thedevelopment and improve the e ff ectivenessof professional people management allover the world. Its members are predomi-nantly continental federations, which aremade of up of more than 90 nationalpersonnel associations representing over600,000 people management professionals.For more information, please visit www.wfpma.com.


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From Capability toPro tabilityRealizing the Value of People Management

Rainer Strack, Jean-Michel Caye, Carsten von der Linden,Horacio Quiros, and Pieter Haen

July


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Good people practices confer a performance advantage. This nding is especiallyimportant today, as companies cope with a growing talent crisis and chroniceconomic uncertainty. But just how strong is the correlation to economic perfor-mance? And what practices count the most? BCG, in partnership with the WorldFederation of People Management Associations (WFPMA), recently explored this

question as part of its annual Creating People Advantage research study.

P P A T B LCompanies that are highly capable in 22 key HR topics consistently enjoyed bettereconomic performance than those less capable. In several topics, this correlationwas strikingup to 3.5 times the revenue growth and as much as 2.1 times theaverage pro t margin. So what do high-performing companies do di ff erently?

W D H P S O ? T B TThe high performers di ff erentiated themselves dramatically in three of the mostimportant topics: leadership development, talent management, and performancemanagement and rewards. Within each area, they did more, and they did so more

eff ectively. Among other things, high-performing companies use incentives toengage leaders in people development. They de ne talent more broadly, strive hardto attract internationals, and nurture emerging potentials. And unlike theirless-successful peers, they clearly de ne performance norms and standards andadopt them enterprisewide.

AT A GLANCE


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I the nancial crisis, departmental budgets have increasinglybeen allocated on the basis of return on investment. For HR departments,quantifying the economic value of people management is a tricky proposition. Yetnow is not the time for companies to skimp on their people expenditures. Withthe pressures of globalization, the growing scarcity of talent, and an employer-

employee relationship frayed by persistent economic pressures, companiestodaymore than evermust regard their human capital as an asset worthy ofcontinual investment .

Theres yet another compelling reason to remain committed to investing in people:companies that do so enjoy better economic performance. Those that excel inleadership development, talent management, and performance management , forexample, experience substantially higher revenue growth and pro t margins. Forthe companies that keep dedicating capital to their human capital, what is thenature of this connection? What are they doing right?

The Boston Consulting Group and the World Federation of People Management

Associations (WFPMA) recently conducted major research to probe the relationshipbetween people management capabilities and nancial performance. We surveyed4,288 HR and non-HR managers on their current HR capabilities and challenges,the strategies and approaches they use to address these challenges, and the di ffi cul-ties they foresee in attracting, managing, and developing people.

People Practices and the Bottom LineOur analysis con rmed what people companies have long sensed: good peoplepractices confer a performance advantage. But just how strong is the correlation toeconomic performance? As a preliminary test, we looked at Fortune magazines100 Best Companies to Work For. Consider the average growth in share price forthese companies between 2001 and 2011. (See Exhibit 1.) The perennial 100 Best(that is, the companies that have made the list for three or more years) outper-formed the S&P 500 in eight out of ten yearsand over the course of the decade,they cumulatively beat the S&P 500 by 99 percentage points.

Does this mean that good HR practices drive good performance? Or that goodperformance enables good HR practices? To claim a direct cause-and-e ff ect linkhere would be overreaching. But probing the relationship between HR practicesand business performance is a worthwhile exercise if it sheds light on those activi-ties that seem to be particularly bene cial.


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We then asked our BCG/WFPMA survey participants to rate their current capability inthe 22 HR topics that comprise the framework of our annual Creating People Advantage study. Moreover, we asked them to report their companys revenue growth from 2010through 2011 and average pro t margin in 2011. In 21 out of 22 topics, we identi ed apositive correlation between capability and performance: companies that rated their

current capabilities very high experienced signi cantly greater revenue growth andhigher average pro t margins than those characterizing their capabilities as low. (SeeExhibit 2.) Even mastering classic HR processes showed a markedly positive impact on nancial performance. These results underscore the fact that people management is aholistic process. Because the impacts of the 22 topics are interrelated, its important toexcel in all of them.

High-performing companies consistently did more in all major activities with inthese topics than their low-performing peers, but in certain activities their e ff ortstruly stood out. For six topics in particular, the correlation between capability andeconomic performance was striking: recruiting, onboarding new hires and employ-ee retention, talent management , employer branding, performance managementand rewards, and leadership development . For example, companies adept atrecruiting enjoyed 3.5 times the revenue growth and 2.0 times the pro t margin oftheir less capable peers. In talent management, the highly capable enjoyed morethan twice the revenue growth and pro t margin of those less capable. And compa-nies that are serious about leadership development experienced 2.1 times therevenue growth and 1.8 times the pro t margin.

This prompted the question: what concrete actions correlate with business perfor-mance? In other words, what do the high-performing companiesthe top 10 percentby revenue growth and pro t margindo di ff erently from the bottom 10 percent?

Cumulative growth rate of share price (%) 1

Year

50

50

100

0

150

+109

+10

S&P 500

Companies that madeFortunes 100 BestCompanies to Work Forlist at least three timesin the past ten years

+99percentage

points

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

People companiesoutperform themarket average in

eight out of ten years

Sources: 2012 BCG/WFPMA proprietary web survey and analysis.1Based on end-of-year closing prices.2Average growth rate of companies share prices in percent (weighted by 2001 share prices), dependent onsample composition for each particular year.

E | People Companies Outperform the Market Average


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The People Advantage TriadTaking into account the ndings of our interviews with leading business and HRexecutives across the globe, we focused on three of the outstanding six topicsidenti ed above: leadership development, talent management, and performancemanagement and rewards. These three topics encompass more (and more varied)people-management activities, thus o ff ering companies more levers for boostingtheir performance advantage. Our quantitative survey results con rmed the impor-tance of these topics, revealing signi cant di ff erences in the concrete actions takenby high- versus low-performing companies. (See Exhibit 3.)

Lets examine major di ff erences across these three pivotal areas.

L : M P D P J D

High-performing companies recognize that leadership is about more than juststeering the business. Its about nurturing, energizing, and challenging the peoplewho help make it runand who keep it competitive. To sustain success, a company

Topic in which most capable and leastcapable companies were compared

Delivering on recruiting

Mastering HR processes

Providing shared services and outsourcing HR

Global people management and international expansion

Enhancing employee engagement

Managing change and cultural transformationManaging diversity and inclusion

Restructuring the organizationManaging work-life balance

Actively using web 2.0 for HR and managing associated risks

Managing an aging workforce

Managing corporate social responsibilityDelivering critical learning programs

Health and security managementManaging exibility and labor costs

Strategic workforce planning

Transforming HR into a strategic partner

Onboarding of new hires and retention

Developing leadership

Managing talent

Performance management and rewards

Improving employer branding

prot margin

2.0x

1.8x

1.7x

1.7x

1.6x

1.4x1.5x

1.3x1.2x

1.4x

1.1x

1.3x1.4x

1.5x1.4x

1.5x

1.4x

1.9x

1.8x

2.1x

2.0x

1.8x

revenue growth

3.5x

1.8x

1.6x

1.8x

1.8x

1.5x1.6x

1.2x1.1x

1.5x

0.8x

1.5x1.5x

1.2x1.2x

1.4x

1.4x

2.5x

2.1x

2.2x

2.1x

2.4x

The impact that the most capable companiesachieve over the least capable companies in...

6

22

1

2

3

4

5

78

9101112131415161718192021

Source: 2012 BCG/WFPMA proprietary web survey and analysis.Note: Revenue growth and profit margin are defined as categories in the survey. For analysis, categories are transformed into category means;extreme categories are transformed into 20% or +20%. For each topic, we compared average revenue growth and average profit margin ofrespondents who chose 5 (high capability) against those who chose 1 (low capability).

E | Economic In uence Is Discernible in All HR Topics but Is Most Pronounced in Six

The whole idea ofleader as coach andfacilitator will takehold.

Cynthia Trudell,Chief Human ResourcesO ffi cer, PepsiCo


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needs leaders who care about and develop their peopleleaders who understandthat building a talent pipeline should extend beyond successors to top managementto include everyone whose contributions are essential to the companys future.

Speci cally, what do high-performing companies do di ff erently?

They are 1.5 times more likely to have in place a leadership model that describesexpected contributions and behavior and that is grounded in company values. Suchmodels go beyond clichs, o ff ering actionable guidelines that inspire leadersand that leaders aspire todaily.

Their leadership model guides talent selection and promotion decisions1.7 times aso en as low-performing companies. In high-performing companies, the performancemanagement system is tied to the companys business strategy and includesleadership objectives and talent development activities. Managers are thus promot-ed on the basis of their individual performance as well as their people-developmentactivitiesboth of which are linked to company strategy and objectives.

They make leadership planning an integral part of their people-planning e ff orts 2.2times as o en as low-performing companies. Ensuring a leadership pipeline is seen as

treat and trackperformance with

transparency

Compared with low-performing companies, high-performing companies

build strongerpeople leaders

do more toattract, develop,

and retaintalented people

1.7

1.5

2.2

3.4

2.6

2.2

1.8

1.42.7

2.9

#1

1.72.1

as o en have clear norms that drive performanceas o en use global standards in performance management

more likely to have a leadership model that describes expected contributionsand behavior

more o en have a leadership model that drives promotion decisions

as o en make future leadership planning an integral part of people planning

as o en make their leaders compensation and careers dependent on their peopledevelopment efforts

as o en try to attract internationals to diversify talent

more likely to have programs for high- and emerging potentials to improvedevelopment and retention

more likely to offer career advancement opportunities and have clearly denedtracks to improve development and retentionas o en better than competitors in offering change of work locations

reason for workforce relocation is personal development (vs. technical knowledgetransfer, the #1 reason for low-performing companies)

Source: 2012 BCG/WFPMA proprietary web survey and analysis.Note: High performer = top 10% of companies by profit margin and revenue growth; low performer = bottom 10% of companies by profit marginand revenue growth.

E | In Three Key Areas, High-Performing Companies Di ff er Substantially fromLow-Performing Companies


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an ongoing practice and not an ad hoc e ff ort. High-performing companies embedtheir leadership planning in their comprehensive strategic workforce planning.They divide their entire workforce, from leaders to entry-level personnel, into job

families and conduct long-term supply-and-demand analysis, which they use toplan concrete actions for their recruitment and training and development e ff orts.

They make leaders compensation and career advancement dependent in part onleaders people-development e ff orts3.4 times as o en as low-performing companiesdo. High-performing companies do not relegate people development to the HRfunction. Instead, they view their leaders as the frontline developers of talent.Leaders are best positioned to see people in action and to recognize, shape, andinspire potential talent. They are also best positioned to cultivate in their directreports the kind of leadership traits valued by the company (and those neces-sary for success in the twenty- rst century, such as the adaptive leadership quali-ties weve observed in todays best-run companies). 1 As Jordi Gaju, chief devel-

opment o ffi cer at the Chilean retailer Falabella, says, Every boss must becomea human resources manager. To make sure their leaders embrace this responsi-bility, high-performing companies link career advancement, performancebonuses, and other rewards to leaders people-development activities.

T M : P , BD R Excellence in one critical HR area wont compensate for shortcomings in another.Having an attractive employer brand might help you nab the talent, but its notenough to help you hold on to it. High-performing companies understand this well;they distinguish themselves from the rest in the sheer extent of their talent-devel-opment e ff orts. (For an example of the multifaceted approach to talent manage-

ment, see the sidebar How LOral Is Building a Talent Advantage.)

They know, for example, that global talent risk is soaring, and they therefore realizethe importance of buildingrather than just buyingtalent. 2 As we discussed inthe December 2011 BCG article Make Talent, Not War, relying too heavily onexternal talent o en leads to bidding contests that can diminish the quality of newhires, yield bad matches, increase turnover, and raise expenses. 3 Mindful of theurgency of the talent shortage, high-performing companies also accelerate criticalactivities wherever possible.

According to our survey, high-performing companies capitalize on a broad array ofstrategies, initiatives, methodologies, and programs to ensure they have the talentthey need, now and in the future. These e ff orts include the following:

They are 1.8 times as likely as low-performing companies to try to attract interna-tional employees. High-performing companies recognize the strategic and practi-cal importance of diversifying the talent base. As companies operations andcustomer bases each become more globalized, local talent that understandslocal markets will give companies greater long-term competitive advantage.Furthermore, high-performing companies interest in international talentapplies across the experience spectrum. These companies are 40 percent moreactive in managing an international talent pool for senior leaders.

Our employer brandis attractive, so Imsure we have a lot oftalent. The problemis, we lose many goodpeople because theyare not identied astalent, and we dontcreate suffi cientcareer-developmentopportunities forthem.

Deputy Group SeniorVice President, HumanResources, leadingEuropean telco


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High-performing companies are 1.4 to 2.7 times more likely to provide development programs for emerging as well as high potentials. They actively work to lever-age and retain existing talent at both ends of the talent development chain.They systematically de ne development requirements for high-potentialemployees; for example, they maintain a list of critical assignments appropriatefor the development of high potentials much more o en than low-performingcompanies do. High-performing companies also de ne talent more broadlynot

just in identifying emerging potentials but also in seeking and nurturing diverse,complementary thinkers and those with deep functional expertise, rather than

just management track candidates.

High-performing companies are 1.7 to 2.1 times more likely to o ff er career advancement opportunities with clearly de ned career tracks. High-performing companiesprovide a broad menu of horizontal as well as vertical opportunities. Doing sokeeps employees satis ed and professionally ful lled while also helping compa-nies retain the full range of talent necessary for enterprise success.

With 27 global brands and 20.3billion in 2011 sales, LOral Groupdominates the global beauty-prod-ucts market. And it has everyintention of remaining number one,with a growth target for the nextdecade of more than 1 billion newcustomers.

The linchpin of its growth strategy isbuilding what the company calls itstalent advantage. LOral has

adopted a strategic approach to devel-oping its talent portfolio and allocat-ing resources. Its purpose: to supportgrowth by ensuring a steady supply ofleaders and key competencies incritical geographies.

Using quantitative models, HR andbusiness leaders analyze anticipat-ed business needssuch as sourcesof growth or expanded productionto identify the companys future

talent needs. They also examineHRs needs; for example, how muchonboarding will be required as aresult of recruitment e ff orts?

Projecting out ve years, leadersthen calculate the number of peopleneeded by geography, function, andmanagerial level. The modelingpinpoints oversupplies and gaps,enabling LOral to take preventiveaction. For example, it allows thecompany to modulate the careerpace of certain employee groupsearly enough to avoid frustratingtalent in the event of a slowdownor to accelerate it to ll any talent or

experience gaps that might arise.HR also projects the costs andpotential return on investment ofvarious scenarios. Talent planninghelps us to strategize growth and tosupport our ongoing transforma-tion, says Jean-Claude Le Grand,global senior vice president ofexecutive talent.

This supply-and-demand methodol-ogy helps LOral to effi cientlyleverage its multifaceted talentsystem, which is designed to boostexecutive talent development. Thesystem involves the following:

HOW LORAL IS BUILDING A TALENT ADVANTAGE


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High-performing companies are 2.9 times as o en better than their competition ino ff ering a change of work location. Moreover, the number-one reason for workforce

relocation for high-performing companies is personal development unlike low-perform-ing companies, which use relocation primarily to ll local knowledge gaps. High-performing companies actively foster employees individual development, andrelocation and job rotation are among the development opportunities they provide.They recognize that beyond job stability and a good salary, todays employee seeksa ful lling work experience as well as the opportunity for personal growth. Inparticular, those employees from the so-called Millennial generation have greaterexpectations and are more willing to leave employers that cant meet them. As thevice president of HR at a major media company says, We believe that creating afast-paced, stimulating environment that fosters individuals growth is a much moreengaging environment to work in than one that is purely pro t-oriented.

Together, these quanti ed ndings highlight what employee surveys tell us: avariety of enriching talent-management programs and practices are the mainreason people stay with their employerscompensation alone wont do.

Incentivizing leaders to identify anddevelop talent on their team. Thismeasure helps embed the talentculture while promoting mentoring.

Motivating talent to migrate to strategic, high-growth zones bylinking career development opportu-nities to these areas, throughproactive rotation and interna-tional mobility.

Appointing talent managers incritical markets to reinforce localrecruiting, promote the employerbrand locally, and optimizeonboarding. This initiative is alsodesigned to minimize the highturnover common in emergingmarkets.

Establishing talent incubators to helpfeed the pipeline. Through specialyearlong assignments, talentdevelopment is accelerated, andpeople are placed in managementroles quickly.

Enhancing career visibility andleadership expectations by estab-lishing clear, uniform de nitionsof talent and performancestandards.

Among its many bene ts, LOralstalent-planning program reinforcesthe business-HR partnership bycreating a common understanding ofthe companys major businesspriorities and their HR implications.

As Jrme Tixier, group HR director,observes, The focus and involve-ment of our managers and HR iswhat makes our company a truetalent builder.


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P M R : C N ,M P IMany high-performing companies link managers bonuses or other incentives with

business KPIs to ensure managers are aligned with company strategy and goals. Butthese companies also know that performance management goes beyond ensuringemployee alignment. High-performing companies understand the importance of awell-constructed, balanced performance-management system in motivating anddeveloping employees.

To fosterand sustainexcellent employee performance, companies need tocreate the right incentives. Developing a culture of meritocracy is key. High-performing companies recognize the value of fair, transparent measurement andrewards systems in promoting such a culture.

They have clear norms that drive performance2.6 times as o en as low-perform-ing companies. Employees understand clearly what constitutes superior perfor-mance and, just as clearly, what is unacceptable. A performance managementsystem that is overly complicated or obscure, however, can hamper employeeengagement. Organizations that dont clarify unacceptable performanceandthen surprise employees with repercussionsmay engender ill will and risktarnishing the companys reputation. And those that dont clearly explain theirrewards system undermine workforce cohesiveness and even risk losingvaluable talent.

High-performing companies have global performance-management standards in place 2.2 times as o en as low-performing ones. Although many corporate HR depart-ments provide guidance on performance standards throughout their organiza-

tions, units continue to follow localized standards at most companies. High-per-forming companies use state-of-the-art performance-management methods andsystems and ensure that these are adopted on a global basis.

In all the activities we studied, high-performing companies reward behavior, not just results, to a greater degree than low-performing companies. And while they putgreater stock in performance management systems, they do not get mired inprocess. They avoid bureaucratic or protracted review processes that can actuallyallow problems to worsen. High-performing companies emphasize feedback andopen discussion, as well as more frequent, o en informal, reviews. These have theadded bene t of motivating employees.

Critical Mass CountsIts no news that being well-rounded in people management represents an invest-ment in the companys long-term success. But at many companies today, thatinvestment is at riskeven as talent risk has escalated. Before leaders yield to thetemptation to cut back on people spending, they must keep in mind that peoplemanagement has become an imperative.

The good news is that its not just an imperative; its an investment with a tangi-ble, near-term return. As weve shown, the correlation between people capabilities

We have a rmlyestablished perfor-

mance-managementprocess in place with

clear and transparentperformance criteria.

We apply it consis-tently across the

entire organization.

This enables us tocontinuously promoteour top performers

and, at the sametime, motivate and

manage all otherperformance groups.

HR Executive, global telco


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and economic success is undeniable. People management mastery translates into

economic successand competitive advantage.

But excelling in leadership development , talent management, and performancemanagement is not enough. Being a people company means doing more across theentire spectrum of people management act ivities, from employer branding toemployee retention.

And critical mass matters: companies must be good at many activities, and theymust integrate those ac tivities. Moreover, its not enough to carry out importantpeople-management activities in a step-by-step, linear fashion. Each critical topic,and the critical activities it entails, needs to be carried out in parallel. There is anintegrated logic in how a company builds, for example, its talent management, lead-ership development, and performance management e ff orts. So apply as manylevers as possible simultaneously. Thats the key to keeping the supply of talent andleadershipalong with economic performancesteady and sustainable.

N1. See Winning Practices of Adaptive Leadership Teams , BCG Focus, April 2012.2. See Global Talent Risk Seven Responses , a report published by the World Economic Forum in collabo-ration with BCG in 2011.3. Make Talent, Not War, BCG article, December 2011; derived from Creating People Advantage 2011:Time to ActCertainties in Uncertain Times , BCG report, September 2011.

This study is a preview of the ndingsof our forthcoming 2012 globalsurvey on people management,which is part of the Creating People

Advantage series BCG has publishedannually since 2007. 1 It is also thethird global study produced inpartnership with the World Federa-tion of People Management Associa-tions (WFPMA). For the 2012 study,we surveyed 4,288 respondents in102 countries across a broad range of

industries, from consumer goods andtransportation to banking and healthcare. From our list of 22 HR topics,we asked companies to rate theircurrent capabilities on a scale of 1 to5 (where 1 = least capable and 5 =most capable); we then identi ed thecapability gaps between high- andlow-performing companies. To

determine the correlation betweenpeople capabilities and economicsuccess, we also asked the surveyrespondents to indicate their revenuegrowth and average pro t-marginchange from 2010 through 2011. 2

The complete study results, alongwith comprehensive analysis, willappear in the fullCreating People

Advantage report, to be published inOctober 2012. Visit bcgperspectives.

com for further details.

N1. The most recent Creating People Advantage report, Time to Act: HR Certainties in UncertainTimes, was published in September 2011.2. Due to a technical adjustment, there weretwo different response-category ranges used forthese questions (10% to 20% versus 10.1% to20%), which showed no impact on the results.

STUDY METHODOLOGY


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About the AuthorsRainer Strack is a senior partner and managing director in the Dsseldorf offi ce of The BostonConsulting Group and the European leader of the rms Organization practice. He is a global topicleader for HR and coleader of BCGs Creating People Advantage research. You may contact him by

e-mail at [email protected].

Jean-Michel Caye is a senior partner and managing director in therms Paris offi ce. He is aglobal topic leader for HR and coleader of BCGs Creating People Advantage research. You maycontact him by e-mail at [email protected].

Carsten von der Linden is a project leader in BCGs Munich offi ce. You may contact him bye-mail at [email protected].

Horacio Quiros is president of the World Federation of People Management Associations(WFPMA) and a past president of the Argentine HR Association and the Interamerican Federationof People Management Associations. He is also the corporate human resources director of GrupoClarin. You may contact him by e-mail at [email protected].

Pieter Haen is secretary general of the World Federation of People Management Associations(WFPMA), a past president of the European Association for People Management (EAPM), andfounder and president of the Duurstede Groep. You may contact him by e-mail at [email protected].

AcknowledgmentsThe authors would like to off er their sincere thanks to Christian Adler, Vinciane Beauchene,David Bendig, Jacqueline Betz, Florian Grassl, Alexander Kluger, Stefanie Michor, Cleo Race,Martin Scheunemann, Ulrich Schlattmann, and other BCG colleagues for contributing theirinsights and for helping to dra this report. They would also like to acknowledge Jan Koch for herwriting and editing assistance, as well as Katherine Andrews, Gary Callahan, Sarah Davis, OliverDost, Kim Friedman, Abigail Garland, Bernd Linde, and Sara Strassenreiter for their contribu-

tions to the reports editing, design, and production.For Further ContactIf you would like to discuss this report, please contact one of the authors.


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The Boston Consulting Group, Inc. 2012. All rights reserved.7/12


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