Making talent a strategic priority

Companies like to promote the idea that employees are their biggest source of competitive advantage. Yet the astonishing reality is that most of them are as unprepared for the challenge of finding, motivating, and retaining capable workers as they were a decade ago.

Ten years after McKinsey conducted its War for Talent research, the 1997 study drawing attention to an imminent shortage of executives, the problem remains acute—and if anything has become worse. Companies face a demographic landscape dominated by the looming retirement of baby boomers in the developed world and by a dearth of young people entering the workforce in Western Europe. Meanwhile, question marks remain over the appropriateness of the talent in many emerging markets.

Business leaders are deeply concerned, judging by two McKinsey Quarterly global surveys. The first, in 2006, indicated that the respondents regarded finding talented people as likely to be the single most important managerial preoccupation for the rest of this decade. The second, conducted in November 2007, revealed that nearly half of the respondents expect intensifying competition for talent—and the increasingly global nature of that competition—to have a major effect on their companies over the next five years. No other global trend was considered nearly as significant.

The War for Talent never ended. Executives must constantly rethink the way their companies plan to attract, motivate, and retain employees.

The enemy within

To a considerable extent, executives must blame themselves for their current talent woes. Granted, shareholders and investment analysts are largely responsible for the obsession with short-term performance. But managers too readily treat talent in a reactive, knee-jerk manner—say, by hiring additional sales and marketing people only when new product stake off. “Short-termism,” as one European HR director recently observed, diverts management attention from longer-term issues such as talent sourcing and career development. Since investments in talent intangibles are expensed rather than capitalized, managers may try to raise short-term earnings by cutting discretionary expenditures on people development. This tendency may turn into a vicious circle: a lack of talent blocks corporate growth, creating additional performance pressures that further divert the attention and thinking of executives toward the short term.

When companies do make talent a priority, they often fall into another trap: focusing narrowly on HR systems and processes, which divert attention from the place where most of the obstacles lie: people’s heads. “Habits of mind are the real barriers to talent management,” one financial-services executive confided.

Some of the key strategies emerging from the article include:

• Target talent at all levels
• Develop a number of value propositions
• Bolster HR

Ten years ago, HR specialists were preoccupied largely with formulating and managing standard processes—notably, recruitment, training, compensation, and performance management. We believed then, as we do now, that human resources should assert its influence over business strategy and provide credible and proactive counsel and support for the chiefs and line managers of individual business units. Only HR can translate a business strategy into a detailed talent strategy: for instance, how many people does the company need in order to execute its business strategy, where does it need them, and what skills should they have?

Unfortunately, the credibility and influence of HR executives have declined over the past decade, and the function has failed to develop many critical capabilities. According to our research, 58 per cent of all line managers believe that the HR function lacks the wherewithal to develop talent strategies in line with a company’s business objectives, though only 25 per cent of the HR professionals in our interviews agreed.

HR leaders need to widen their focus beyond senior management and better address the needs of the front line. “HR serves only the to players,” complained one global HR director recently. “My head of HR inNorth America works only with the CEO—nobody knows her, and she doesn’t know where the talent lies in the business.”

In the same spirit, HR departments need to get a better feel for segmentation and internal marketing in order to create and define a number of different employee value propositions. HR managers a Southwest Airlines, for example, use such skills to treat its frontline contact employees as internal customers by researching their needs and preferences as energetically as the company’s marketers investigate those of its external customers.

Finally, HR directors should acquire deeper business knowledge. At Procter & Gamble, for instance, an aspiring HR manager is expected either to take a job in a plant or to work alongside a key-account executive to learn about a business unit and win the confidence of its managers. Coca-Cola Enterprises rotates top-performing line managers into HR positions for two or three years to build the business skills of its HR professionals and to make the function more credible to the business units.

McKinsey’s War for Talent research emphasized the importance of instilling a deep commitment to talent throughout the organization, starting at the top and cascading through the ranks. Our most recent work emphasizes our belief in the importance of getting this “soft side” right; otherwise, we often observe, managers easily succumb to short-term pressures and fail to embed a talent strategy in the overall strategy of the business.

What’s needed is a deep-rooted conviction, among business unit heads and line leaders, that people really matter—that leaders must develop the capabilities of employees, nurture their careers, and manage the performance of individuals and teams. HR professionals, meanwhile, need to improve their ability to translate business needs into talent strategies. We consistently see that top-performing companies instil the mind-set and culture needed to manage talent effectively. A strong people culture actually reinforces a key part of a company’s employee value propositions.

Now that intensifying demographic, macroeconomic, and technological changes are adding to the pressure, companies need to view talent management as a business priority, and senior executives must invest significant amounts of time in creating strategies that attract, motivate, and retain talent. Such a strategy will be successful when it nurtures talent at all levels, develops a number of employee value propositions to attract and retain different kinds of workers, and boosts HR’s role and capabilities.

About the Authors

Matt Guthridge is an associate principal and Emily Lawson is a principal in McKinsey’s London office; Asmus Komm is a principal in the Hamburg office.

Notes

¹Theoriginal yearlong study, entitled “The War for Talent,” was conducted in 1997. Its authors later published a book of the same name, which was based on updated research conducted during 2000. See Ed Michaels, Helen Handfield-Jones, and Beth Axelrod, The War for Talent, Boston: Harvard Business School Press, 2001.

² More than 10,000 respondents completed the 2006 survey. The 2007 survey on the organization (see “The organizational challenges of global trends: A McKinsey Global Survey,” mckinseyquarterly.com, December 2007), was completed by more than 1,300 executives.

³Lowell L. Bryan, “Making a market in knowledge,” The McKinsey Quarterly, 2004 Number 3, pp. 100–11.

⁴Lowell L. Bryan, “The new metrics of corporate performance: Profit per employee,” mckinseyquarterly.com, February 2007.

⁵Covers the period from 2003 to 2006.

⁶US Human Capital Effectiveness Report 2005–06, Saratoga Institute.

⁷Chartered Management Institute’s 2005 National Management Salary Survey, based on responses from almost 21,000 UK managers.

⁸Thomas J. DeLong and Vineeta Vijayaraghavan, “Let’s hear it for B players,” Harvard Business Review, June 2003, Volume 81, Number 6, pp. 96–101.

⁹Mohan Subramaniam and Mark A. Youndt, “The influence of social capital on the types of innovative capabilities,” Academy of Management Journal, 2005, Volume 48, Number 3, pp. 450–63.

¹⁰Boris Groysberg, Ashish Nanda, and Nitin Nohria, “The risky business of hiring stars,” Harvard Business Review, May 2004, Volume 82, Number 5, pp. 93–100.

¹¹GenerationX consists of people born from 1965 to 1980. The lives of its members have been shaped by forces such as the Internet, growing workplace diversity, the end of “jobs for life,” and higher rates of parental divorce.

Matthew Guthridge, Asmus B. Komm and Emily Lawson

January 2008

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