Digital Workforce Capability

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Is digital creating a workforce capability crisis?

Transcript of Digital Workforce Capability

Page 1: Digital Workforce Capability

Is digital creating a workforce capability crisis?

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In a world of uncertainty, organizations need to change rapidly – and you need your people to be agile and adaptable to that change. At the same time, it is getting harder to source, manage, motivate and retain talent while controlling costs. Leaders need to adapt to the changing market conditions.

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1Avoiding the Digital Capability Crisis |

In recent years, organizations in the mining and oil industries have precipitated a capability crisis by over paying and over investing in selective skill sets based on demand. Talent was secured at an expensive rate and locked in with a short-term focus on the assumption of ever increasing commodity prices. Disastrously, due to capability constraints, wage increases were locked into long after commodity prices began to fall. Companies were left with large and expensive workforces in a changing economic landscape, putting their financial viability at risk.

As we see new demand for digital capability exponentially escalate, organizations across many industries are in danger of falling into the same trap. Shortages in critical digital skills sets could see digital and technology specialists commanding rising salaries. Even though global capability will be leveraged to combat this, there’s a real danger that wage inflation will build in certain digital skill areas. Certainly, companies are at risk of being locked into traditional salaries and payment structures well above market rates, as global talent comes in and wages undergo a correction.

To avoid this, organizations need a new employment and engagement models that takes a different approach to matching current capability with a strategic plan and the future capability requirements. Otherwise, we are likely to see a repeat of the capability crises in mining and oil, with organizations finding themselves over paying for skills that quickly become redundant.

This paper explores previous and current capability crises in vertical industries before examining the evidence pointing to a rising digital capability crisis across almost every sector. Finally, it looks at a new employment model that will help organizations to better align capability supply and demand as they start hiring to complete in the digital economy.

The war for talent never ceases as organizations seek to build new elements of competitive advantage. However, the real battle – played out every day – is to understand how to attract and retain the right future and current capability at an affordable price.

We hope this paper offers new insights that will help executives win this battle.

Darren Gibson Global Advisory People and Organisational Change Leader

Foreword

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Chart 1Australian Mining Industry: Wage Growth vs Commodity Prices

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1 International Labour Organisation, Global Wage Database

2 Australian Bureau of Statistics, Employee Earnings and Hours Report, 2012

Learning from the lessons of the past

iron ore prices. The failure of mining companies to forecast this cost issue and thus control wage acceleration has brought their commercial viability into question. There has also been a lack of design around new engagement models that could be used to control or manage the cost.

At issue is the likely continued decline in iron ore prices due to reduced demand from China and the untenable position of employers locked into a long-term wage pricing that is no longer affordable. There is also an unwillingness to confront industrial relations, employee relations and change issues. Even redundancies are unlikely to be a viable way out of the current dilemma due to the impact of large scale termination payments and impacts on cash flow.

Wage inflation out of control in miningBetween 2007 and 2013, Australian wages rose more than in any developed G20 nation.1 Average wages were particularly boosted by unprecedented wage acceleration in the mining sector, where short labor supply and rising commodity prices led to extraordinary rates of compensation and overall employment costs. In May 2012, the mining industry was paying the highest wages in the country, with average take home earnings sitting at close to AU$2,390 per week2, nearly four times the lowest weekly full time employment earnings recorded in the country.

Then, after 15 years of exceptional growth rates peaking at US$190 per tonne, iron ore commodity prices finally began to fall. But wages did not experience a similar contraction (see Chart 1). In the last four years, wages have been reduced to minimal growth, but they have not fallen to match the decline in

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Chart 2Australian Mining Industry: Wage Growth vs Commodity Prices

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3 Wall Street Journal, Oil Jobs Squeezed as Prices Plummet, 28 December 2014

4 Digital Australia: State of the Nation, EY Sweeney, 2014 https://digitalaustralia.ey.com/

Oil industry now showing similar trendsHistory is now repeating itself in the oil industry, which is about to find itself in the same situation, as the price of oil has almost halved over the last six months (see Chart 2).

In the US, from the end of the June 2009 recession to October 2014, employment jumped by almost 50% in sectors most closely related to oil and gas extraction. This compares with a 7% gain across all job sectors.3 Wages in such industries also saw a marked increase. For example, average earnings for workers in oil and gas extraction climbed nearly 23% compared with a 13% increase for all US workers.

As the US oil industry tries to get wages back under control, many companies may find themselves in the same position as Australia’s iron ore miners.

Both the mining and oil sectors have experienced wage inflation that can be tracked to rising commodity prices and a lack of skilled staff. Employment costs also failed to fall after both respective booms receded. The resulting operational cost structures in the mining and oil sectors have eaten directly into margins, resulting in the reassessment of assets for financial viability.

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Rapidly shifting skills requirementsHistorically, the focus of automation has been on work that requires routine, repetitive tasks. Now this is changing. Advancements in technology, including innovations in artificial intelligence, are allowing new categories of jobs to be mechanized. As a result, many existing technology jobs will become redundant and new opportunities to develop, service or operate the next generation of software and machines will arise. For example, large internal IT infrastructure teams will be made redundant as organizations move into cloud technologies and organizations such as Amazon develop unique ways to manage data and solutions in the cloud. Drivers of mining trucks will be replaced with radio frequency (RF) technicians who will monitor and control many driverless trucks. But these positions will require advanced skills, which will be in short supply and hence only available at a premium. It is highly unlikely that an IT business analyst experienced in applying SAP patches and updates will be able to manage Amazon Large data environments, or that a mining truck driver will be retrained to be an RF technician.

In this new job market, the relative importance of digital and technology occupations will increase. We can already see this occurring in the occupations the US O*NET program considers to have a ‘bright outlook’.5 O*NET defines bright outlook jobs as those where employment is projected to increase 22% or more over the period 2012-2020.

The O*NET data show that the information technology career cluster is well ahead of all the other occupations considered to have a bright outlook6 (see Chart 3). The OECD reports similar trends in Europe.7

Signs of a rising digital capability crisis

5 Bureau of Labor Statistics (2013),”2012-2022 Employment Projections”, www.onetonline.org/help/bright/

6 http://www.onetonline.org/

7 OECD (2014), “Skills and Jobs in the Internet Economy”, OECD Digital Economy Papers, No. 242, OECD Publishing. http://dx.doiorg/10.1787/5jxvbrjm9bns-en

Organizational capability requirements are moving into unknown territory, driven by digital growth and disruption. Traditional employment models will be unable to keep pace with the changes required to adapt to the new digital environment.

Increasing demand for digital capability and pass of digital technology evolutionFuelled by the convergence of social, mobile, cloud, big data and growing demand for anytime anywhere access to information, digital technology is disrupting all areas of the business enterprise. Disruptive technologies are those defined as rapidly advancing or experiencing breakthroughs and which have both broad-reaching and significant economic impact estimated in the tens of trillions of dollars per year. Digital disruption is taking place across all industries and in all geographies.

Enormous opportunities exist for enterprises to take advantage of connected devices enabled by the ‘internet of things’ to capture vast amounts of information, enter new markets, transform existing products, and introduce new business and delivery models. However, Australian businesses may not be as prepared as their global counterparts to respond: according to the EY Digital State of the Nation report, 40% of Australian consumers and 59% of digital opinion leaders believe Australia is less advanced in digital than other developed nations4.

The evolution of the digital enterprise also presents significant challenges that organizations must respond to, including new competition, changing customer engagement and business models, privacy concerns and cybersecurity threats. The evolution will also include the way in which organizations will engage with their workforces and required capability skill sets.

New skills will be required to succeed in this rapidly evolving environment. The pace of workforce skill evolution is also at a level that has never been experienced. Skills that were required nine months ago are now being seen as redundant, and new capability is now limited. Thinking and problem solving skills are now expected in line with the technical skills, not in addition too. Enterprises and workforces able to seize the opportunities offered by digital advances stand to gain significantly.

Winners will be those who understand the new capability they will need to operate in the digital world now and into the future along a defined roadmap. This roadmap would include the capability they can afford to lose in the short term, verse the capability required in the future.

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The Information and Communications Technology (ICT) market shows signs of future skills shortagesIn Australia, growth in ICT employment has risen steadily since the mid ‘90s (see Chart 4), reflecting the introduction of PCs in the workplace that decade, the impact of the internet in the 2000s and currently big data, analytics and mobility. The current forecasts also indicate additional growth in this area, driven by the evolution of technology, the introduction of new technologies and the increasing growth in digital technologies.

Although we have yet to see widespread shortages within the ICT professional occupations locally, research shows that employers consider many applicants to be unsuitable, mainly due to lack of experience in the industry, or in the specific software or language used.8 Also, many roles in the digital world are not being filled, or in some cases even looked for, because technologies are so new that the capability does not exist in the Australian market. According to the research, employers had very specific skill and experience requirements and considered proven expertise to be more important than qualifications. Supporting the argument that it is not about capacity – the challenge ahead is focused on the right capability.

8 Australian Government, Department of Employment, Information and Communications Technology Labour Market Indicators report, May 2014

In the next three to nine years, we anticipate shortages in key niche areas such as data analytics, cloud, digital architecture, digital designers and app development. As competition increases for these experienced skill sets, wage inflation will begin to build unless companies change their traditional fixed employment models. Otherwise, we are likely to see a repeat of the capability crises in mining and oil, with organizations finding themselves over paying for skills that quickly become redundant. This is especially likely in the case of digital capabilities, given the extreme speed of change we can already see as technologies are superseded in record time.

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Chart 3Percentage of occupations in the category that are considered to have a bright outlook

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Better aligning capability supply and demand

• Align to an agile operating model which can be continuously improved and adopted as a way of life

• Understand the capability that an organization has and how this is aligned to what it needs. At an individual level this can mean getting the right person in the right role. For example, the IT Business analyst who manipulates data in Excel to produce executive reports may not be the person who can forecast big data business trends and report on the organization’s performance against market trends. Similarly, the best salesman may not be the best manager or an accomplished surgeon will not necessarily make the best hospital general manager

• Reassess what and how capability is bought into the organization and how capability is retired from the organization

• Identify organizational capability and how much is used and when it is used. Build a flexible employment model that caters to the ebbs and flows in demand with supply options that suit the business and employee needs

• Link to a variable remuneration lever to ensure corporate survival and ongoing organizational profitability where the value of capability is linked to current performance not historical fixed elements

• Engage more digitally with talent, connecting to skills and resources on demand by tapping into networks of workers through contracting, outsourcing, partnerships with suppliers of capability, online crowdsourcing, talent hubs and freelance platforms

• Acquire and retain the best digital talent

• Develop training to skill existing employees with digital capability.

Organizations need new employment models with mechanisms that recognize and adapt to changes in capability requirements over time. By linking capability plans to future needs and organizational performance, they will be able to manage the digital capability crisis.

In most organizations, the supply and demand sides of capability (the ability to deliver on customer and market commitments) are often mis-aligned. Currently the CFO has the primary focus on the financial performance of the business, and this focus caters to the demand side of capability. In a neighbouring silo, the Chief Human Resources Officer looks at the organization from a “hire to retire” perspective, the supply side. Although leaders in organizations know that supply and demand are intrinsically linked, the organisational model does not effectively enable the two functions to support each other.

Organizations need to understand, forecast and plan for how capability supply and demand intersect – now and into the future. This will require moving from a model that employs people with a defined skill set to one that optimizes the engagement of capability, and is able to adapt to the future capability needs of an organization.

Based on EY’s experience of working with large organizations to build these models in environments with unpredictable capability demands, such a model will:

Based on EY’s experience of working with large organizations to build these models in environments with unpredictable capability demands, such a model will:

• Be informed by workforce capability data and business performance metrics, from HR and finance, ensuring both supply and demand are understood in real time

• Allow for industry, sector and environmental impact

Are you asking the right questions of your workforce?

• What capability do you have today?

• What capability do you need today?

• What capability will you need in the future? When? How much?

• Is there a realistic development path, and if not who will plan manage and execute the redundancy program?

• What are you willing to pay for that capability?

• What capability do you need to Buy Develop Retire right now?

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Digital disruption is happening now and the workforce resource and capability needed by businesses to succeed in the future are rare and will continue to be sought-after. The challenge for organizations is to start planning and forecasting the workforce needs of the future today. This can be achieved by dynamically modelling and forecasting workforce capability requirements in a way that is aligned to business strategy and financial models.

Organizations need to start looking at new workforce engagement models and develop new pathways to access workforce capability ecosystems. Digital is disrupting every part of our business model, including the traditional employee-employer relationship. The most successful organizations will be those that are able to adapt to a new way of working and workforce engagement using multiple, but equitable, workforce engagement models.

We know that people are critical to the success of every organization, so we team globally with you to change, enabling you to enhance the value of your workforce, and your people to enhance their roles and careers.

Darren GibsonGlobal Advisory People and Organizational Change (P&OC) Leader +61 2 9248 4970

Steve KossOceania P&OC Leader +61 2 9248 4568

Alex LeeMalaysia P&OC Leader +60 3 7495 8778

Dilys BoeySingapore P&OC Leader +65 6309 6246

Benson NgGreater China P&OC Leader +852 2849 9365

Conclusion

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice

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