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HR for neophytes

Peter Cappelli
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There are many ways to meet your talent needs — hiring from outside, developing existing employees, or contract staffing. Which is the best option?

It’s a worldwide trend that has been under way for nearly a decade: Responsibility for talent management is shifting from human resources to front-line executives. The transition is driven partly by cost cutting — head counts in HR departments fell sharply during the Great Recession — but it is also fuelled by the recognition that many aspects of talent management are best handled by day-to-day managers.

For many line managers, the shift presents challenges. Investments in human capital are highly uncertain; the returns are less predictable than those from, say, new machinery. Some talent management activities that worked well for decades no longer pay off. And acquiring skills in this area can be difficult: Research suggests that some of the most widely held beliefs about managing people are misguided.

Executives newly responsible for talent management may benefit from thinking about the questions below:

What are our talent needs? The first problem facing managers thinking about talent is the quality of information at their disposal. Can you quickly answer these questions: Which schools, recruiters and rival firms have provided your best employees? What are the costs of a vacant position, or of underused workers? What percentage of vacancies do you fill internally, and how does that square with your investments in development? What are the performance differences between your employees?

Some of what you think you know about these issues is probably wrong. For instance, one of the biggest misconceptions about managing talent is the belief that performance problems spring from individual failure. Most people aren’t innately good, average or poor performers; the quality of their work depends in large part on context. Getting the best performance from employees often depends on putting them in the right job, with the right boss. Keep that in mind before investing money and energy to “upgrade” your talent.

How should we meet our talent needs? Often when managers think about obtaining talent, they think only about hiring. In fact, there are three ways to meet talent needs. You can buy talent, by hiring from the outside. You can build it, by developing existing employees. Or you can borrow it, by engaging contractors or temporary workers.

How to choose? Start with costs. My colleague Matthew Bidwell at the University of Pennsylvania’s Wharton School studied executives recruited from the outside and ones promoted to the same jobs from within. It took three years for the outside hires to perform as well as the internal hires — but it took seven years for the pay of the internal hires to catch up with that of the outsiders. Consider, too, the direct costs of conducting an outside search and the indirect costs (low morale, high turnover) of bypassing internal candidates. It’s usually much more expensive to bring in talent.

Also weigh costs against risk. Developing existing employees can save money, but it’s a long-term bet, which increases the chances that something will go wrong. Hiring can give you someone who already has the right skills, but the price tag is higher. Borrowing talent provides a just-in-time solution, but do you want to pay the premium? If you’re fairly certain of your future needs and your ability to retain talent, a long-term bet makes sense. If not, it’s worth spending more to reduce your risk.

Despite the cost of borrowed workers, few companies are strategic about their use. Some firms overestimate the flexibility these workers provide: Another Bidwell study found that employers are slow to terminate temp workers when business turns down.

How can we do a better job of hiring? Hiring may be the single hardest task in organisational life. The process has two distinct phases. The first is recruiting. Managers may be delighted if they’re besieged by applicants. But screening applicants is expensive, and a glut actually signals poor recruiting. Smart managers want a small pool of high-quality applicants. You can attain that by scaring away unsuitable candidates or communicating that your organisation isn’t for everyone. Good recruiters also find people who aren’t looking to change jobs but might consider it if approached.

The second phase is selection. This is hard too, because candidates may overstate their qualifications, and because many managers are poor at predicting who will be the best hire, especially for a job that requires significant experience.

Fortunately, there’s a solution: Outsource the hiring function. Unless you regularly bring in a lot of people for the same types of jobs or operate on a very large scale, you’ll probably get better results at lower cost if outside recruiters gather applicants and winnow the field to a small number from which you can select.

How can we develop internal talent? A vicious cycle drives the reliance on external hires: Leaders think they can’t afford to groom employees for bigger roles because those employees might leave. And employees who aren’t groomed for bigger roles often leave, reinforcing managers’ fears about the instability of their current employees.

But entire industries, including accounting and professional services, invest heavily in development, experience high turnover and yet remain highly profitable. The skills in greatest demand — technical, sales and executive skills — can be learned only on the job. Work-based learning is best done in stretch assignments, and it’s best managed by direct supervisors, who have the keenest sense of when an employee is ready for a new task and have ready access to appropriate project work.

If your employees want classroom training, provide tuition reimbursement programmes. The beauty of those programmes is that employees attend classes after hours; companies incur no costs for lost work time. My research shows that employers who offer tuition reimbursement attract better applicants and have lower turnover than other firms.

How can we manage employees’ career paths? The single best way to retain valued employees is to give them better opportunities than they could find elsewhere. The problem is that promising a clear career path is impossible given all the uncertainties in business. One way companies skirt the problem is by creating a transparent internal market for talent. They post any vacancies, and interested employees apply and make their case.

It can be tempting to put talent management at the bottom of your to-do list. It’s true that focusing on it will increase your workload in the short run. But it can generate significant returns over the long term. Asking (and answering) the questions above can decrease turnover among ambitious employees, minimise reliance on expensive outside hires or borrowed workers and limit the number of employees who are disengaged from their jobs because they don’t see those jobs as leading to a better future.

Peter Cappelli is the George W. Taylor Professor of Management at the University of Pennsylvania's Wharton School, and the author of “Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It.”

© 2013 Harvard Business School Publishing Corp.

The single best way to retain valued employees is to give them better opportunities than they could find elsewhere.

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