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ECONOMY

Managing Demographic Risk by Rainer Strack, Jens Baier, and Anders Fahlander

FROM THE FEBRUARY 2008 ISSUE

Most executives in developed nations are vaguely aware that a major demographic shiftis about to transform their societies and their companies—and assume there is littlethey can do about such a monumental change. They’re right in the first instance, wrong in the second.

The statistics are compelling. In most developed economies, the workforce is steadily aging, a

reflection of declining birth rates and the graying of the baby boom generation. The percentage of

the U.S. workforce between the ages of 55 and 64, for example, is growing faster than any other age

group.

The situation is particularly acute in certain industries. In the U.S. energy sector, more than a third

of the workforce already is over 50 years old, and that age group is expected to grow by more than

25% by 2020. The number of workers over the age of 50 in the Japanese financial services sector is

projected to rise by 61% between now and then. Indeed, even in an emerging economy like China’s,

the number of manufacturing workers aged 50 or older will more than double in the next 15 years.

But national and even industry statistics like these serve mainly to put managers on notice of a

general problem. The important issue is the demographic risk your own firm faces. As employees

get older and retire, businesses can face significant losses of critical knowledge and skills, as well as

decreased productivity. The demographic trend has been exacerbated by the relentless focus on cost

reduction that’s become the business norm. In their zeal to become lean, organizations continue to

have round after round of layoffs—without realizing that in just a few years they may confront

severe labor shortages or, if they’ve shed mostly younger workers, be left with a relatively old

workforce. In some cases, a company’s ability to conduct business may even be hindered: When

people begin retiring in droves, there may be no one left who knows how to operate crucial

equipment or manage important customer relationships.

We offer here a systematic approach to analyzing future workforce supply and demand under

different growth scenarios and on a job-by-job basis. It enables companies to determine how many

employees they are likely to need, which qualifications they should have, and when they will need

them. With that information, they can set up a tailored retention, recruitment, and talent

management strategy for the job functions at greatest risk of a labor shortage. Such an initiative

must be launched long before things reach a crisis stage, because the remedies may need years to

take effect. Companies that act early not only will minimize the risk but also will gain an important

advantage over their rivals.

The Nature of the Risk

In coming years, corporations will face two categories of demographic risk: risks having to do with

retiring employees and risks having to do with aging employees. Both require creative forethought

and active management.

Retiring employees. When a worker retires, you lose someone to do a job and the accumulated knowledge and expertise

that this person takes out the door with him. If many people are retiring and they’re difficult to

replace, your organization faces what we call capacity risk—a potentially diminished ability to carry

out the company’s business of making a product or offering a service.

Take RWE, Europe’s third-largest energy utility, a company we’ve worked with on assessing and

managing demographic risk. The publicly traded German utility, which in 2006 had annual sales of

€44 billion and more than 70,000 employees, restructured several times over the past decade. The

power generation and mining division, RWE Power, for example, basically cut its workforce in half

between 1992 and today. Until recently, the company was encouraging older workers to leave under

large-scale early retirement schemes.

When the Problem Is Growth As veterans of “talent wars” know, rapid

growth can create labor shortages. In

India, for example, where labor is thought

to be plentiful and the workforce is

relatively young, we’re already seeing

early signs of severe scarcities of workers

in certain specialized jobs. Our approach

to demographic risk—systematically

assessing and managing the risk by job

function—can also be used in industries

or countries where economic growth

threatens to outstrip growth in the

workforce.

Take the example of an Eastern European

bank that was losing workers not to

retirement but to attrition, as competitors

fought to attract talent in an industry that

was burgeoning while capitalism took hold

in the formerly Communist market. By

analyzing future workforce supply and

demand under different growth scenarios

and on a job-by-job basis, the bank

But an analysis of retirement trends and future labor demand at the company—over time horizons of

five, 10, and 15 years—revealed that today’s workforce surplus would in several years turn into a

shortfall in many parts of the business. And the loss of talent due to retirement would occur just as

the recruitment of new employees for critical positions at the company became more difficult.

In many developed economies, there already is a mismatch between labor supply and demand.

Germany today faces an immediate shortage of qualified engineering graduates. In 2006 the country

had a deficit of approximately 48,000 engineers, and that figure is expected to grow significantly in

coming years. At the same time, the country has too many unskilled workers: The unemployment

rate of unskilled labor is more than six times higher than that of university graduates. Most

industrialized countries face similar situations. (Some developing economies also face a skill

shortage, at least in certain industries, a problem discussed in the sidebar “When the Problem Is

Growth.”)

Aging employees. Even before older workers start retiring in large

numbers, they can pose distinct management

challenges. Of course, age brings experience and

wisdom that make employees extremely valuable

in all kinds of ways. However, in certain settings,

productivity may suffer. For example, older

workers may not have the robustness needed in

physically demanding manufacturing jobs. They

may lack up-to-date skills owing to technological

changes. In certain situations, they may become

less motivated because they see fewer career

opportunities ahead of them. They may also be

susceptible to health problems that increase

absenteeism or force them into reduced work

roles. Thus, although age and experience can

make workers more effective in many positions,

in certain jobs an aging workforce can create a

productivity risk.

determined how many employees it was likely to need, what qualifications they should have, and when it would need them. With that information, the bank set up a tailored retention, recruitment, and talent management strategy for the job functions at greatest risk of a labor shortage.

A Looming Challenge An aging workforce will have implications for most developed economies, but managers need to examine the particular effect it will have on their own companies by looking at the age distribution of their employee base. When RWE Power, the power generation and mining division of a European utility, examined the demographics of its workforce, it saw that if current trends continued, in 10 years a large percentage of its workers would be at or near retirement.

The importance of effectively addressing demographic changes can be seen at a business like RWE

Power. Today, some 20% of the division’s workforce is over the age of 50. Projections indicate that

this age group will make up more than half the workforce by 2011—and close to 80% by 2018. (See

the exhibit “A Looming Challenge.”)

Some of the issues raised by an aging workforce

may not be immediately evident. For example,

several thousand employees work in a three-shift

environment at RWE Power, but many won’t have

the stamina—or their doctors’ permission—to

work in rotating shifts as they grow older. So RWE

Power will have to find not only new positions for

the three-shift workers who can’t function in

their jobs any longer but also replacements for

them. Although the problem of finding a new job

for an employee no longer able to work in a three-

shift environment is less likely to arise in the

United States, which lacks the job protection laws

common in Europe, political or other

considerations may create similar constraints.

When calculating both kinds of demographic risk

—capacity risk and productivity risk—it’s

important to use the right metrics. For example, a

Workers over age 50 will make up more than half the workforce of the business by 2011— and close to 80% by 2018.

relatively high average age among employees

doesn’t necessarily signify a serious risk of losing

crucial talent to retirement. The distribution of

ages—that is, whether a large percentage of your

employees are clustered within a relatively

narrow age band—is the real sign that you’ll

encounter this problem. If a skewed distribution

in the age structure does exist, however, the

average age of employees will let you know when

you’ll face it.

Assessing the Risk

Capacity risk and productivity risk are assessed

differently. In the case of capacity risk, you

determine the gap between your organization’s

future demand for workers and anticipated

workforce levels, and then figure out how difficult

it will be to close that gap by hiring from outside

the company. In the case of productivity risk, you

determine how many workers will fall into older

age cohorts in coming years and what

implications that will have.

Calculating the risks at a companywide level doesn’t provide an accurate picture of the problem.

Drilling down to the level of individual locations or business units is more useful. But in the end you

need to figure out how age trends will affect three different categories of jobs: relatively broad job

groups, narrower job families within each of those groups, and more specific job functions within

each of the families.

Bringing the analysis down to these levels will almost certainly reveal an anticipated surplus of

people in certain job groups, families, and functions and a shortfall in others. Managing the risk will

require addressing the problem at these levels as well. Indeed, using uniform remedies across an

entire company would be ineffective and probably counterproductive, especially for productivity

risk, which varies significantly by job category.

Let’s look at what’s involved in this progressively granular analysis, focusing in detail on the

problem of retiring workers and capacity risk.

Run a quick check to identify where potential challenges lie. The first step is to do a relatively simple analysis of your company’s situation, one that draws on

easily available company data. The aim is to determine, by location and business unit, future

workforce levels and age distribution, based on anticipated retirement and attrition rates. Much of

the information—for example, the number of employees and their respective ages—can be pulled

from existing HR data systems and fed into a simple simulation tool that forecasts what will happen

under a number of scenarios over the next five to 15 years. Historical data on such things as attrition

and recruiting can be used to generate projections, but these need to be enriched with management

discussions of future trends. RWE Power’s historic annual attrition rate of less than 1%, for instance,

could rise as demand for specialized workers grows in the labor market.

This first analytical cut quickly provides a good idea of which locations and business units are likely

to have the steepest age distribution and most dramatic capacity losses. In units or locations with

the highest problems, companies can then do a more detailed analysis.

Create a job taxonomy to refine your assessment. You’ll need to continue the analysis at the level of the three job categories: groups, families, and

functions. Employees within each category share similar skills and can transfer within them, but the

amount of time it takes to successfully transition to a new job varies with each category.

Within a job function, employees can get up to speed in new positions in less than three months,

with relatively little training. Within a job family, it takes employees changing roles less than 18

months to acquire the necessary skills. Within a job group, a transfer may require up to 36 months

and significant training.

Creating a Job Taxonomy for Your Company Companies can mitigate critical worker

shortages by transferring employees into

open jobs. So the first step in assessing

demographic risk is to evaluate how easily

you can shift employees among positions.

You can do this by categorizing jobs in the

company on three levels: functions,

families, and groups.

Job functions comprise jobs that are essentially the same, but in different

locations, or similar enough to require the

same sets of skills. In the hypothetical

example below, all system controllers are

in the same job function because they all

have detailed knowledge about the

operation of power-plant control systems.

Workers transferring within a function can

get up to speed in less than three months,

with relatively little training.

Job functions that require closely related

but somewhat different knowledge and

skills belong to the same job family. Here, system controllers and power electronics

electricians are in the same family

because both are skilled electricians who

have deep knowledge about operational

processes but who work on different

electronic systems. Employees can

successfully transition to new roles within

a family in less than 18 months, with the

right training.

Where Will You Face Talent Gaps? To identify where your greatest challenges

will lie as workers retire or leave, you need

to forecast what your workforce needs will

be in each job function—or, as a first cut,

in each job family—at different points in

the future. This forecast requires two

inputs: internal workforce supply (that is,

your company’s anticipated workforce

levels, given assumptions about

retirement age, early retirement

programs, and attrition rates) and

workforce demand (based on strategic

RWE Power held workshops at which operational managers categorized jobs based on this notion of

exchangeability. Then the job function, family, and group that each employee belonged to were

entered in the company’s employee data system. (The exhibit “Creating a Job Taxonomy for Your

Company” shows how certain jobs might be classified.)

Categorizing employees based on their skills and

the exchangeability of those skills is crucial to the

systematic evaluation and management of

demographic risk. That’s because the more time it

takes to train someone to do another job, the

more it will cost to prevent a shortage of workers

as people retire.

Pinpoint potential capacity problems. Having developed this taxonomy of job

categories, you can begin identifying what your

organization’s greatest capacity challenges will be

as workers retire. (The exhibit “Where Will You

Face Talent Gaps?” lays out a multistep approach

to assessing your capacity risk.)

Similar job families are part of the same job group. This illustrative chart shows that system controllers and electrical planners belong to the electrician job group. Shifting from system controller to electrical planner, however, would require an employee to learn new planning processes, planning standards, and planning software. Workers transferring to new positions outside their job family but within their job group require up to 36 months of training.

If you enter each employee’s job function, family, and group in your employee database, you can easily identify transfers that could eliminate future labor shortfalls in particular jobs—and determine how long it would take to provide the training needed for employees to make the switch.

assumptions about such things as growth targets, emerging business models, productivity increases, and new technologies).

These forecasts—which can range in sophistication from back-of-the-envelope approximations to numbers produced by computer simulation of different scenarios —will yield estimates of anticipated internal shortfalls (or surpluses) in each job function over time.

The chart below shows a relatively simple five-year forecast for one job function, electrical planner.

To get a read on your overall internal capacity risk, determine for each function the extent of the risk (that is, the size of a potential shortfall over time) and the immediacy of the risk (how soon you are likely to face a serious problem). Note that here internal capacity risk will be particularly acute in the case of the system controllers, high-voltage electricians, and electrical planners, who will be in seriously short supply in a few years.

Next, assess the external marketplace risk, to see how difficult it will be to alleviate shortfalls by hiring people from

outside the company when your need for people is greatest. You should take into account both the availability of workers with the requisite skills and the intensity of competition to hire those workers.

Combining your analyses of your internal situation and the labor market will highlight the job functions facing the greatest threat (here, system controller and high-voltage electrician) and those that give little cause for concern (low- voltage electrician). While there will be an internal shortage of electrical planners, those workers are expected to be in plentiful supply in the labor market.

Start by estimating future workforce supply—that is, how many available workers you will have for

each particular job function over the next five to 15 years. You can calculate these anticipated

workforce levels by extending to individual jobs the analysis of retirement and historical attrition

rates you did in the demographic quick check at the division and location level.

Then calculate future workforce demand for each job function by identifying what within your

strategy will drive personnel requirements, again taking into account various scenarios. At RWE

Power, the demand for staff is tied both to anticipated growth—for example, when planned power

plants will come on line—and to productivity gains. In more volatile industries, like auto

manufacturing or banking, forecasting future staff needs by job function is more challenging,

Safeguarding Knowledge Retirement represents the loss of a worker with the skills needed to perform a specific job. It may also represent the loss

requiring the development of an array of scenarios. But an assessment of even worst-case growth

scenarios in these industries will inevitably reveal the need for immediate action in certain job

functions.

Combining these estimates of future workforce supply and demand allows you to determine your

internal capacity risk. For each job function, you should be able to tell both the extent of the risk

(the size of a potential shortfall—or, in some cases, a surplus) and its immediacy (if a shortfall will

happen, when it is likely to occur.)

Using your categorization of jobs by functions, families, and groups, you’ll be able to see how

difficult it will be to replace retiring workers with someone else from within the company. A serious

internal capacity risk exists when there will be a significant shortfall in the workers required for key

job functions in the short to medium term.

The analysis should also take into account that specialized jobs may require a lengthy training and

certification period. In Germany, for example, it takes a three-year apprenticeship to become an

electrician. Then it can require another two years to specialize as a maintenance expert, and two

more to become an electrical master technician. So a company needs to identify a shortfall in

electrical master technicians seven years before it occurs, especially if it will be difficult to fill those

jobs with outside hires. In addition, depending on the degree of off-the-job training required, it

might be necessary to have a surplus of workers for the jobs at each of these stages so that some can

receive the training needed to advance to the next level before the actual gap occurs. A traditional

three-year planning cycle won’t identify those risks in time to respond to them.

Keep in mind, as well, that companies may face a shortfall not simply of workers with needed skills

but of employees with crucial experience and knowledge—particularly specialized knowledge about

the company and its practices. (To learn how U.S. truck maker Freightliner addressed this risk, see

the sidebar “Safeguarding Knowledge.”)

The difficulty of closing a gap depends on the

availability of workers with the skills you need in

the labor market. Consequently, after

determining your internal capacity risk, you

of crucial knowledge whose value to the

organization extends far beyond the

worker’s individual position.

Freightliner, a large truck manufacturer

based in Portland, Oregon, has

anticipated this dual risk. The company (a

division of Daimler that recently changed

its name to Daimler Trucks North America)

saw that the imminent retirement of a

large cohort of its aging workforce

threatened the specialized technical skills

and deep knowledge of customer needs

required to produce the highly customized

trucks it was known for. Previously,

significant layoffs, voluntary severance

programs, and limited external recruiting

had resulted in a relatively old workforce.

In certain functions 30% to 50% of

Freightliner’s workforce would be eligible

for retirement by 2010. The cyclical nature

of its business made the staffing equation

even more difficult.

Once Freightliner recognized it faced a

serious potential problem, it set about

assessing the extent and severity of the

risk, focusing on employees who were key

knowledge holders. The challenge was to

identify these workers as a subset of the

workforce; to segment them based on

whether their knowledge was held by

them alone, by a few employees, or by

many employees; and to transfer their

knowledge so that it wouldn’t be lost to

the organization when they retired.

Using an in-depth survey of 5,000

employees, Freightliner classified

employees by the type of knowledge they

had. Across the company, about 20% of

the population emerged as “key

knowledge holders,” 9% as “unique key

knowledge holders,” and 3% as “at-risk,

unique key knowledge holders” (those

who were eligible to retire within five

should assess the external labor market risk,

again by job family and function. The extent of

the risk will be determined by the availability of

qualified workers and by the competition from

other companies to hire them.

The final step in determining capacity risk

involves combining the assessments of your

internal situation and of the external labor

market, to highlight which job functions will pose

the greatest threat. When it analyzed its

workforce trends, RWE Power found that it would

face a shortage within the company of certain

kinds of highly specialized engineers, that

relatively few of these engineers would be

entering the job market in coming years, and that

competition to hire them would be fierce among

the few large utility companies—creating a

capacity challenge for this job function.

Pinpoint potential productivity losses. A similar approach, if a somewhat more

straightforward process, is used to gauge the risk

of lower productivity and other costs—such as

absenteeism and retraining costs—that can be

related to an aging workforce in certain job

categories. Again, the risk must be assessed at the

level of job group, family, and function, a process

that begins with looking at the age distribution of

employees in each category and how it will

change over time.

years). The risk posed by the departure of

this latter group varied significantly

among different functions. Segmenting

this crucial human resource by function

helped the company set up targeted

knowledge management systems, tandem

staffing arrangements, job rotations, and

other means to capture what these people

knew before they left the company.

Six Ways to Close the Talent Gap Having identified where you are likely to

face the greatest capacity risk, you need

to take steps to minimize it, particularly in

Then you’ll need to determine which job

functions are at risk—because of employees’ ages

and because of the nature of the work—for age-

related productivity losses. At the least, you’ll

want to differentiate between physically

demanding jobs, in which aging can lead to

reduced productivity, and experience-based jobs,

in which aging can lead to higher productivity.

Keep in mind that the implications of employee

aging will vary widely from job to job. Companies

need to understand those differences and develop specific strategies for each job group.

The process of assessing your company’s capacity and productivity risks by location, business unit,

and job category can reveal some daunting challenges—say, a serious shortage of talent in an area

targeted for growth. The key is to identify such a problem far enough in advance to be able to

address it and, in doing so, gain an advantage over your competitors.

Managing the Risk

With detailed information about the demographic risk you face, you’re in a position to

systematically employ an array of measures to manage both capacity risk and productivity risk.

Take steps now to prevent talent shortages. Future shortfalls in a critical job family or function, when spotted early enough, can be mitigated in

two basic ways: by reducing the demand for workers in those jobs and by increasing the supply of

people able to perform them. We’ll look at six methods for closing the gap between workforce

supply and demand, beginning with two aimed at reducing workforce requirements. (See the

sidebar “Six Ways to Close the Talent Gap.”)

An obvious but potentially overlooked method is

productivity improvement, achieved through

process enhancements, for instance, or technical

innovations. Most companies constantly seek to

positions critical to the organization’s future success. This can be done by job category, using a combination of measures. They fall into two general categories:

Reduce your future demand for labor

increase productivity

outsource work

Increase your future supply of qualified workers

transfer employees

train employees

increase employee retention

recruit more workers

improve productivity. But the potential for a

serious labor shortage in a particular job family or

function can focus those efforts.

Companies can also prioritize outsourcing in job

categories in which a labor shortage is looming—

particularly if the shortage looks temporary or if it

involves work that is of limited strategic

importance. Bear in mind, however, that if you

have problems recruiting in certain job categories,

your outsourcer probably faces the same

constraints, so outsourcing may provide only a

partial solution.

Maintaining an adequate supply of talent is

another key to managing potential gaps.

Companies that have categorized their jobs by

functions, families, and groups will have a good

read on the feasibility of job transfers. They can

tap a surplus in a job function or family at one

location or business unit to fill a gap in the same

function or family at another location or business unit—provided they’ve laid the necessary

groundwork for transfers. RWE Power is considering how it can help workers prepare for a potential

transfer to a similar but different job or to the same job at a different power plant as the

organization’s production strategy changes.

Training programs play a key role in such preparations. The capacity risk analysis enabled RWE

Power to spot, for instance, cross-training opportunities between its different operations: After a

short learning period, a high-voltage electrician working on large mining equipment can undertake

high-voltage tasks at a power plant, and vice versa. The ability to map the potential for transfers and

training across job categories, business units, and locations gives RWE Power a capability most large

companies lack. (See the exhibit “Sizing Up Your Transfer and Training Options” for a simple

illustration of how training and transfers can be combined to address gaps.)

Sizing Up Your Transfer and

Training Options

If you anticipate a shortfall in one job function at one location in a given year (in this simplified example, the deficit of 35 low-voltage electricians at Location 1), you might be able to alleviate that problem by training people from another job function, in the same job family and at the same location, in which there will be an oversupply (the surplus of 26 high-voltage electricians in Location 1). Although their training might take up to 18 months, you could begin it before the shortfall materializes, because you have spotted the problem early.

Alternatively, if you have identified a surplus of workers in the same job function at another location (the surplus of 12 low-voltage technicians at Location 2), you could transfer some of them to fill the shortage.

As we see here, the shortfall of low- voltage electricians at Location 1 and the shortfall of high-voltage electricians at Location 2 would be eased through a combination of training and transfers— though there would still be a deficit of 19 workers. That would have to be addressed through other measures, including hiring from outside the company.

To ensure that attrition doesn’t exacerbate a

capacity shortfall, it is important to create

sophisticated retention programs targeted at

people in job functions at greatest risk of a talent

shortage. Initiatives include training, career

planning programs, and job rotation programs, as

well as more conventional long-term incentives.

At the minimum, you need to monitor employee

satisfaction and strive to increase it in job

categories facing a serious capacity risk. RWE

Power, for example, has carefully analyzed its

remuneration structure for certain types of

engineers.

Finally, having taken steps to minimize workforce

demand in crucial job categories and to

strengthen the supply of workers from within the

company, you must look outside the organization

for workers to fill any remaining gap. For many

companies, this fundamental business activity—

recruitment—has been a low priority during the

relentless downsizing of recent years. But

because of the major demographic shift now

occurring, developing sophisticated recruiting

programs—that focus not just on hiring more

people but on such things as the careful

positioning of the company brand with

prospective employees—are a top priority.

Companies must learn to target their recruiting

efforts by, for example, identifying specialized

schools that will turn out workers with the skills

required for jobs in at-risk categories. They need

to think ahead, beginning to recruit employees

whose skills may not be in demand today but will

be tomorrow, when shortages emerge. Companies

that anticipate their future needs and act now will

gain a clear competitive advantage over rivals that

are still focused on reducing head count.

This will require a radical change in mind-set for

companies that have been in a prolonged

downsizing mode. For RWE Power, it became

clear that, while it had the financial capital to

construct new power plants, human capital, in

the form of specialized engineers, was the scarce

resource. Consequently, the company launched

an intense effort to close the gap in the short term

—with, for example, focused recruiting drives at

certain universities—and developed a long-term recruitment strategy for these positions. Other

possible responses to such a gap include reactivating retirees or acquiring small companies that

have the sought-after talent.

Ensure that aging workers remain assets. Initiatives focused on the needs of older workers can help address the implications an aging

workforce has for productivity. A systematic review of current HR policies and processes will reveal

adjustments you can make in a variety of areas to turn age-related risks into competitive

opportunities. The key is to tailor these measures to each job function or family, keeping in mind

that the experience that comes with age may increase productivity in certain jobs, such as

engineering or sales positions.

The most obvious moves involve training programs that help older workers update their skills and

leverage their experience. At RWE Power, the operational technology at power plants has changed

significantly since older workers began at the company, and continuing professional development

programs are crucial in maintaining these workers’ production knowledge. A danger is that older

workers will be placed in one-age-fits-all courses that aren’t geared to their particular needs,

knowledge, and strengths. For example, older manufacturing employees’ lack of familiarity with the

internet may make typical web-based training programs unappealing to them. Training older

employees in mixed-age groups can also reduce the value of such programs: They may be

embarrassed to ask questions that younger employees might scoff at. (It should be noted that the

reverse may also be true.)

Another obvious area for productivity enhancement is health care management. On average, older

employees don’t become ill more often than younger employees, they just are ill for longer periods.

Proactive measures, designed to prevent sickness and injury, can reduce the problem significantly.

Such measures should be targeted at employees with a high risk of health problems and tailored to

the jobs they do. They also need to include incentives to encourage participation—say, the offer of

additional vacation days to employees who regularly engage in exercise, which has been shown to

reduce illness-related absences among older workers.

In many cases, workplace accommodations designed to help older workers on the job can increase

productivity. With manual work, companies may focus on enhancing workplace design or revising

employees’ duties—say, by rotating them during the course of a day among tasks that are more and

less physically demanding. RWE Power, which has found that aging could reduce productivity in

production-related job families, is exploring the possibility of personalized work schedules, with

shift lengths tailored to employees’ abilities, and of “lifetime working programs,” in which

employees can accumulate early in their careers credit for overtime hours that can be used to reduce

work hours when they are older.

In a twist on the outsourcing that accompanies most downsizing initiatives, companies might also

consider the strategic “insourcing” of certain jobs as a way to accommodate the abilities of older

workers. That is, less physically demanding tasks currently performed by outside contractors could

be brought back into the company and assigned to older workers who are guaranteed employment

by their contract or by job protection laws but may no longer perform well in their current positions.

Initiatives may also involve developing new compensation structures. The traditional link between

pay and length of service (and hence age) may need to be loosened, and compensation—for certain

activities, at least—more closely linked to performance. Although under such a system, some older

workers may be compensated less than they would have been under the existing system, note again

that, in many job categories, knowledge and experience may in fact lead to superior performance

and higher pay.

While some older workers become more engaged with their jobs (say, after their children have left

home and their domestic responsibilities lessen), others become less motivated because they

perceive they have fewer career opportunities. To counter a potential loss of motivation as workers

approach retirement, companies can try creative age-related performance incentives. For example,

older workers might serve as mentors to new workers, which can increase motivation and

performance. Employees with critical knowledge might be offered the chance to return to the

company and work on special projects on a freelance basis after they’ve retired. This latter approach

has multiple benefits: reducing capacity shortfalls in a crucial job category and keeping valuable

knowledge in the company, as well as motivating employees near retirement to perform well so that

they will be considered for this post-retirement opportunity.

Addressing Tomorrow’s Problem Today

The demographic shift looming on the horizon will radically reshape our workforces. As its impact

becomes more obvious, many companies will realize that they must undertake a monumental,

multiyear change-management program—one that represents an opportunity as well as a response

to a significant challenge.

As we’ve noted, actively addressing demographic risk to retain the skills and know-how needed to

ensure future viability can give companies a competitive advantage over rivals. That means

demographic risk management must be an integral part of yearly strategy setting. Furthermore,

because demographic risk management is not a onetime initiative but an ongoing part of strategy

and risk discussions, the HR department will need to become a true strategic partner of top

management—a role that HR should have assumed long ago, in any case.

Retirees with critical knowledge might be offered the chance to return to the company and work on special projects.

There is no time to waste: Recall the seven-year lead required to train the German master electrical

technician. Companies must adopt a demographic risk management approach now—before their

competitors do and before it is too late to effectively respond to the changes that lie ahead.

A version of this article appeared in the February 2008 issue of Harvard Business Review.

Rainer Strack (strack.rainer@bcg.com) is a partner and managing director,

Jens Baier (baier.jens@bcg.com) is a principal, and

Anders Fahlander (fahlander.anders@bcg.com) is a senior partner and managing director of the Boston Consulting Group.

Strack, a coauthor of “The Surprising Economics of a ‘People Business’” (HBR June 2005), and Baier are based in