For the past few years, as businesses focused on survival in the midst of economic uncertainty, human capital development was pushed aside. As many companies cut employees, the workers who remained had more to do and little time to dream about that corner-office promotion.
Now, with many economies somewhat improved but still wobbly, talent management is emerging as a more prominent issue for many businesses worldwide.
A new CGMA report shows that 43% of chief executives, CFOs and human resources directors believe poor human capital management has kept their companies from reaching key financial targets in the previous 18 months. Forty per cent of executives said subpar talent management hinders their ability to innovate, and the respondents also linked inadequate talent management to issues including the inability to expand into new markets and complete major projects, difficulties forecasting growth and a slide in their company’s competitiveness.
In the financial sector, the correlation was felt strongly: 58% of executives said their firm was unable to start a major project or achieve key financial goals in the previous 18 months because of poor human capital management.
The report, Talent pipeline draining growth: Connecting human capital to the growth agenda, came from results of a global survey of 313 chief executives, CFOs and HR directors. The report was conducted by the Economist Intelligence Unit for the Chartered Institute of Management Accountants (CIMA) and the American Institute of CPAs (AICPA).
Overlooking succession planning
For companies to address the issue of ineffective talent management, establishing succession plans for top-level executive positions is one positive step, but it’s not the solution.
“It takes more than a succession plan,” said Dow Scott, a professor of human resources at Loyola University Chicago’s Quinlan School of Business. “You have to provide development opportunities, not just training programmes, but meaningful assignments. You have to create an internal culture that values development, and you have to have people willing to take on assignments, further their capabilities, so you get the best person from within.”
Most companies focus little attention on succession planning, according to the report. More than half (51%) of executives say that their firms do not have formal succession planning processes in place for top-level roles, and 38% believe their companies will look externally to fill C-level jobs in the next 12 months.
If companies lose key people and do not have a plan to replace them, time is spent making a hire, then more time is spent letting the new hire get acclimated to the company’s culture. No matter how well a new hire fits, there is still a transition period when the company is not moving forward, said David Kvendru, CPA, CGMA, who is the CFO of the San Diego Association of Realtors.
“Without having a clear succession plan and knowing who’s going to take over, the dynamics of the situation, the economy – you can’t just pull somebody off the street and expect them to run the company,” Kvendru said. “It can be much better for a company to have something created for a move-up instead of an external move-in.
“A person hired from outside – maybe they understand the industry, but not the dynamics of the company, and there are politics at every company.”
Who’s in charge?
Global executives say they are aware of the importance of human capital and talent management, but there is a lack of confidence in the measurement of their human capital performance and few agree on who has the mandate and responsibility to do so, according to the report.
Sixty-five per cent of chief executives and CFOs believe the CFO has the mandate to measure the effectiveness of human capital, but 83% of human resources directors say the responsibility is theirs.
Clearly, there’s a further disconnect at the top level: 77% of chief executives plan to cut spending on workforce skills, training and qualifications over the next 18 months, but just 18% of HR directors believe their companies will cut those programmes.
“Ideas are the currency of the knowledge economy, so human capital must be managed as rigourously as financial capital,” said Arleen Thomas, CPA, CGMA, senior vice president for management accounting at the AICPA. “It is clear from our research that many companies are falling short of their potential because they lack thorough, relevant information about their people to support effective strategy, hiring and training decisions.”
Scott, the Loyola University professor, says economic uncertainty and a leaner workforce contribute to less emphasis on training.
“In defence of companies, they’ve come through a huge, huge financial crisis, and they had to thin down, and they probably are not thinking about development,” Scott said. “And employees’ commitment to go the extra mile is pretty well shaken. They can’t keep running faster and faster and faster.”
Studies recently have shown that retention of talent is a global concern, as is declining employee engagement. In a competitive economy, human capital is becoming just as important as a company’s products and services, and many companies have a difficult time measuring the cost of that talent.
Other key findings in the CGMA report:
North American firms report more talent-management difficulties than counterparts in Europe and the Asia-Pacific region. Just 16% of North American companies have personal development programmes in place, compared with 45% of European firms and 35% of Asia-Pacific firms.
One-third of HR directors believe their company has a good understanding of the cost of human capital but not the value of an employee’s skill and experience. In those organisations that struggle to understand the full cost and value, nearly nine in ten CEOs (87%) and five in six CFOs (83%) believe measures of the value of losing and replacing talent are too difficult to obtain.
No matter who is supplying the information, chief executives doubt its accuracy—just 12% are confident about the quality of metrics they receive on human capital. Nearly two-fifths (38%) of HR directors said their company struggled to get accurate data and metrics on “human capital costs, productivity, value and ROI.”
In the report, the AICPA and CIMA recommend strategies to combat subpar talent management:
Get the right information: The data on human capital must be credible, but it also needs to be analysed correctly to aid in decision-making.
Set better performance measures: Companies should develop human capital metrics aligned with overall business goals.
Establish accountability: Organisations should be clear on ownership of human capital management performance.
Encourage partnering: Structure the organisation to ensure alignment of human capital to business strategy between finance and HR.
Additional CGMA resources:
“The Fast Track to Leadership”: In many organisations, finance is supporting the business to meet its strategic objectives and building a sustainable business model to take it beyond its more traditional role of financial stewardship and operational responsibilities. In these forward-looking organisations, finance is evolving from a focus on the transactional and cost-efficiency areas through an analytical and decision support stage to a real strategic focus where it can make a real impact.
“The Invisible Elephant and the Pyramid Treasure”: There has been an unprecedented change in the demands of leadership over the past decade – change that has highlighted a need for leaders who prioritise the true stakeholders of their organisations – customers, employees, suppliers, the community, the planet and the shareholders – rather than putting personal reward first.
“Rebooting Business: Valuing the Human Dimension”: The human dimensions of business – for example, customer and supplier relationships, talent development as well as intellectual capital – will be the focus in the months ahead.
“Execs Battle Skills Gap in Hiring Despite High Unemployment”: Executives report difficulty finding qualified workers despite high jobless rates. Recruiting workers for positions as varied as engineers, accountants and tugboat workers is a problem. Hire-and-train employee development and new educational initiatives may provide solutions.
—Neil Amato (firstname.lastname@example.org) is a CGMA Magazine senior editor.