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BELCOURT | PODOLSKY

STRATEGIC HUMAN RESOURCES

PLANNING SEVENTH EDITION

B E L C O U R T P O D O L S K Y

STRATEGIC HUM AN RESOURCES PLANNING

SEVENTH EDITION

NELSON SERIES IN HUMAN RESOURCES MANAGEMENTHRM

STRATEGIC HUMAN RESOURCES PLANNING SEVENTH EDITION

Part of the market-leading series in Human Resources Management, this new seventh edition of Strategic Human Resources Planning has been updated to reflect current examples and research.

The Nelson Series in Human Resources Management is the best opportunity for students and practitioners to access a complete set of HRM products. The series provides quick access to information across many HRM disciplines and over the years has become an essential source of information, meeting the requirements for professional designation from the CPHR Canada and the provincial HR associations. This one-stop resource will prove useful for anyone looking for solutions for the effective management of people.

Other titles in the Nelson Series in Human Resources Management: Industrial Relations in Canada, Robert Hebdon, Travor C. Brown Recruitment and Selection in Canada, Victor M. Catano, Willi H. Wiesner, Rick D. Hackett Management of Occupational Health and Safety, E. Kevin Kelloway, Lori Francis, Bernadette Gatien Managing Performance through Training and Development, Alan M. Saks, Robert R. Haccoun Strategic Compensation in Canada, Richard J. Long, Parbudyal Singh

nelson.com

9 780176 798086

ISBN-10: 0-17-679808-0 ISBN-13: 978-0-17-679808-6

STRATEGIC HUMAN RESOURCES PLANNING

SEVENTH EDITION

HRM NELSON SERIES IN HUMAN RESOURCES MANAGEMENT

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MONICA BELCOURT SCHOOL OF HUMAN RESOURCE

MANAGEMENT, FACULTY OF LIBERAL ARTS AND PROFESSIONAL STUDIES, YORK

UNIVERSITY

MARK PODOLSKY SCHOOL OF HUMAN RESOURCE MANAGEMENT,

FACULTY OF LIBERAL ARTS AND PROFESSIONAL STUDIES, YORK UNIVERSITY

STRATEGIC HUMAN RESOURCES PLANNING

SEVENTH EDITION

HRM NELSON SERIES IN HUMAN RESOURCES MANAGEMENT

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Strategic Human Resources Planning, Seventh Edition

by Monica Belcourt and Mark Podolsky

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Library and Archives Canada Cataloguing in Publication Data

Belcourt, Monica, author Strategic human resources planning / Monica Belcourt, Mark Podolsky. — Seventh edition.

Issued in print and electronic formats. ISBN 978-0-17-679808-6 (hardcover).— ISBN 978-0- 17-685680-9 (PDF)

1. Manpower planning—Textbooks. 2. Personnel management—

Textbooks. 3. Strategic planning—Textbooks. 4. Textbooks. I. Podolsky, Mark,

author II. Title.

HF5549.5.M3B45 2018 658.3'01 C2018-901919-0 C2018-901920-4

ISBN-13: 978-0-17-679808-6 ISBN-10: 0-17-679808-0

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To Zabeen Hirji, formerly Executive Vice-President and Chief Human Resources Officer, RBC and currently Global Advisor, Future of Work, Deloitte for her strategic work in HRM.

M.B.

To Mary Jo, Jackson, and Claire, for the joy that you bring to my life. M.P.

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NEL vii

BRIEF CONTENTS

About the Series xxi

About the Authors xxii

Preface xxiii

Acknowledgments xxix

Chapter 1 Strategic Management 1

Chapter 2 Aligning HR with Strategy 29

Chapter 3 Environmental Influences on HRM 55

Chapter 4 The HR Forecasting Process 80

Chapter 5 Determining HR Demand 103

Chapter 6 Ascertaining HR Supply 135

Chapter 7 Succession Management 165

Chapter 8 Information Technology for HR Planning 198

Chapter 9 Change Management 220

Chapter 10 Downsizing and Restructuring 253

Chapter 11 Strategic International HRM 287

Chapter 12 Mergers and Acquisitions 315

Chapter 13 Outsourcing 345

Chapter 14 HR Assessment and Analytics 367

Glossary 407

Index 412

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CONTENTS

About the Series xxi About the Authors xxii Preface xxiii Acknowledgments xxix

Chapter 1 Strategic Management 1 Chapter Learning Outcomes 1 Strategic Management at The Bay 2 A Need for Strategic HRM 2

Strategy 3 Strategic Types 6

Corporate Strategies 6 Business Strategies 10

The Strategic Planning Process 11 1. Establish the Mission, Vision, and Values 11 2. Develop Objectives 14 3. Analyze the External Environment 15 4. Identify the Competitive Advantage 15 5. Determine the Competitive Position 18 6. Implement the Strategy 19 7. Evaluate the Performance 19 Benefits of Strategy Formulation 20

Summary 21 Key Terms 22 Discussion Questions 22 Exercises 23 Case Study: Loblaw Companies Ltd. 23 References 26

Chapter 2 Aligning HR with Strategy 29 Chapter Learning Outcomes 29 HR Structure at Johnson and Johnson 30

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Strategic HRM 30 Theories of the Strategic Management of Human Resources 31

HRM Making Strategic Contributions 31 The Contingency Perspective 32 Behavioural Theory 34 Strategic HR Planning 35 The Importance of Strategic HR Planning 36 Improved Goal Attainment 36

Linking HR Processes to Strategy 37 Corporate Strategy Leads to HR Strategy 38 HR Competencies Lead to Business Strategy 43 Reciprocal Interdependency Between HR Strategy and Business Strategy 43 HR Becomes a Business Partner 43

Strategic Partnering 44 Becoming More Strategic 45 HR Strategy Differentiation 46

Characteristics of an Effective HRM Strategy 46 Focus on Results 48

Summary 49 Key Terms 49 Discussion Questions 49 Exercises 49 Case Study: Linking HR Practices to Performance 50 References 51

Chapter 3 Environmental Influences on HRM 55 Chapter Learning Outcomes 55 Environmental Scanning at GM 56 Introduction 56 Environmental Scanning Sources and Methods 57

Sources of Information 58 Methods of Forecasting 61

Competitive Intelligence 61 Challenges in Environmental Scanning 62

Isolating the Critical from the Insignificant 62

CONTENTS

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Environmental Factors 62 Economic Climate 63 Globalization 64 Political and Legislative Factors 65 Technological Factors 65 Demographic Factors 67 Social and Cultural Factors 69 Stakeholders 70 Responding to External Factors 72 A Proactive Approach 73

Summary 76 Key Terms 76 Discussion Questions 76 Exercises: Scenario Planning 76 Case Study: Work–Life Family Balance 77 References 78

Chapter 4 The HR Forecasting Process 80 Chapter Learning Outcomes 80 Workforce Planning in Canada 81 What Is HR Forecasting? 81 The Strategic Importance of HR Forecasting 81

Increasing Organizational Flexibility 83 Ensuring a Close Linkage to the Macro Business Forecasting Process 83 Ensuring That Organizational Requirements Take Precedence Over Issues of Resource Constraint and Scarcity 85

The Value of Human Capital to the Firm 86 Generic Human Capital 86 Firm-Specific Human Capital 86 Human Capital Stock and Flows 86

Key Human Capital Analyses Conducted by HR Forecasters 88 Strategic Forecasting 88

The Forecasting Process 90 Forecasting Methods 91

CONTENTS

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Environmental and Organizational Factors Affecting HR Forecasting 94 HR Forecasting Time Horizons 94 Reconciling Net HR Requirements 97 Institute HR Programs and Policies 97

Summary 97 Key Terms 99 Discussion Questions 99 Exercise 99 Case Study: Forecasting for Home Support Workers 100 References 101

Chapter 5 Determining HR Demand 103 Chapter Learning Outcomes 103 Increase in Uncertainty Around the Demand for Labour

in Canada 104 Forecasting Demand 104

Certainty in Forecasting 105 Volume and Complexity of Available Data 105

Quantitative Methods 106 Trend/Ratio Analysis 106 Time Series Models 108 Regression Analysis 109 Structural Equation Modelling 117

Qualitative Forecasting Techniques 117 Management Survey 117 Scenario Planning 119 Delphi Technique 121 Nominal Group Technique 123

HR Budgets/Staffing Tables 124 Combining Quantitative and Qualitative Methods 126

Simulation 127 Summary 129 Key Terms 129 Discussion Questions 129 Exercise: Scenario Planning 130

CONTENTS

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Case Study: Ontario Power Generation 131 References 132

Chapter 6 Ascertaining HR Supply 135 Chapter Learning Outcomes 135 Aboriginal People: A Growing Labour Source 136 Introduction 136 Segmenting the Internal Supply of Human Capital 137 HR Supply Programs 140

The Role of Employers in Influencing Supply 140 Other Labour Pools 140 Influence of Government Programs 141 HR Retention Programs 142

Methods for Modelling the Supply of Human Capital 144 Skills and Management Inventories 144 Markov Models 145 Linear Programming and Simulation 149 Movement Analysis 150 Vacancy Model 152

Substitution and Other Gap Strategies 154 Managing the Bullwhip Effect 156

Summary 157 Key Terms 157 Discussion Questions 158 Exercise 158 Case Study: HR Planning at M&K 159 References 161

Chapter 7 Succession Management 165 Chapter Learning Outcomes 165 Succession Management at Edwards Lifesciences 166 Importance of Succession Management 166

Evolution of Succession Management 168 Broader Focus 168 Time Horizon 169 Talent Pools 169

CONTENTS

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Rating System 171 Succession Management Process 172

Summary 188 Key Terms 189 Discussion Questions 189 Exercises 189 Case Study 1: The People Development Framework at Ford of Canada 190 Case Study 2: Executive Succession Management Program at Emend

Management Consulting 192 References 194

Chapter 8 Information Technology for HR Planning 198 Chapter Learning Outcomes 198 Software for HR Planning 199 IT and HRM 199 New Service Delivery Models 200

Web-based HR 200 Enterprise Portals 201 Self-Service 201

Different Solutions for Different Needs 201 HRIS 202 Specialty Products 203 Enterprise Solutions 203

Big Data 203 Types of Big Data 204 The Five Pillars of Big Data 205 Artificial Intelligence and Machine Learning 206 Ethics and Big Data 206

HR Metrics and Workforce Analytics 207 Maximizing the Benefits of HR Metrics 210

Other Aspects of IT for HR Planning 212 Workforce Management and Scheduling 212 Forensic Reporting 213 Ensuring Data Security 213

Evaluating HR Technology 214 Conduct a Needs Analysis 214

CONTENTS

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Summary 215 Key Terms 215 Discussion Questions 216 Exercises 216 Case Study: Sustaining Talent with Strategic Workforce Planning

Software at the Energy Resources Conservation Board 217 References 218

Chapter 9 Change Management 220 Chapter Learning Outcomes 220 Can HR Lead Change? 221 Why Is Organizational Change Important? 221

The Increasing Pace of Change 222 Societal, Industrial, and Organizational Levels of Change 222 Models of Organizational Change 223

Organizations as Open Systems 223 The Importance of Feedback 224 Single-Loop Learning 224 Double-Loop Learning 225

The Generic Model of Change 226 Recognizing the Need for Change and Starting the Process 226 Diagnosing What Needs to Be Changed 226 Planning and Preparing for Change 227 Implementing the Change 229 Sustaining the Change 230

The Planned Model of Change 231 Field Theory 232 Group Dynamics 233 Action Research 234 Three-Step Model 235

Development of the Planned Change Approach 237 Emergent Change 238

Chaos Theory and Emergent Change 239 Organizational Learning 241 Strategic HR and Change 245

CONTENTS

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Summary 247 Key Terms 247 Discussion Questions 247 Exercises 247 Case Study: Change at Tiger Boots 248 References 250

Chapter 10 Downsizing and Restructuring 253 Chapter Learning Outcomes 253 Downsizing: A Thing of the Past? 254 The Downsizing Phenomenon 254

Defining Downsizing and Restructuring 255 Why Do Organizations Downsize? 257 The Downsizing Decision and the Sears Closure 258 Alternatives to Downsizing 259

The Future of Work 260 Artificial Intelligence and Job Loss 260 The Amazon Effect 262

Inplacement and Outplacement Issues 262 Some Ethical Considerations 263 Planning for Downsizing 264 Adjusting to Job Loss 264

The “Survivors” of Downsizing 266 Perceptions of Justice 267 Survivor Reactions 268 Impact on the “Downsizers” 269

Financial Performance and Downsizing 269 Consequences of Downsizing 271 Downsizing Strategies 273 Strategic Downsizing 273 Effective and Ineffective Approaches 274

The “New Deal” in Employment and the Psychological Contract 274 Labour Relations Issues 276

Summary 277 Key Terms 277

CONTENTS

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Discussion Questions 277 Exercises 278 Case Study: A Downsizing Decision at the Department of Public Works 278 References 280

Chapter 11 Strategic International HRM 287 Chapter Learning Outcomes 287 The Would-Be Pioneer 288 Introduction 288 Key Challenges Influencing HR Practices and Processes

Within an International Context 289 Workforce Diversity 289 Employment Legislation 289 Security 289

Strategic International Human Resources Management 290 The Domestic Stage and Strategy 291 The Multidomestic Stage and Strategy 291 The Multinational Stage and Strategy 291 The Global Stage 292

Key HR Practices and Processes Within an International Context 293 International Assignments 293 Purposes of International Assignments 293 Types of International Assignments 294

International Human Capital Demand and Supply 295 1. Labour Market Data 297 2. External Human Capital Demand and Supply 298 3. The Environment 298 4. Flexible Labour Strategies 298

International Recruitment and Selection 299 Recruitment 299 Selection 301

Pre-Assignment Training 302 Post-Assignment Activities 304

Repatriation 304 Career Development 305

Labour Relations 307

CONTENTS

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Summary 308 Key Terms 308 Discussion Questions 309 Exercises 309 Case Study: Dangerous Assignments 310 References 311

Chapter 12 Mergers and Acquisitions 315 Chapter Learning Outcomes 315 Big Is Beautiful 316 Mergers and Acquisitions 316 Definitions 316 The Urge to Merge 318

Strategic Benefits 318 Financial Benefits 320 Management Needs 321 Merger Methods 321 The Success Rate of Mergers 322 Financial Impact 322 Impact on Human Resources 324

Cultural Issues in Mergers 325 HR Issues in M&As 330

HR Planning 331 Selection 335 Compensation 336 Performance Appraisal 337 Training and Development 337 Labour Relations 337

Evaluation of Success 338 Summary 339 Key Terms 339 Discussion Questions 339 Exercise 339 Case Study: Molson Coors and Acquisitions 340 References 341

CONTENTS

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Chapter 13 Outsourcing 345 Chapter Learning Outcomes 345 Outsourcing at Canadian Banks 346 Outsourcing 346

Outsourcing HR Functions 346 The Rationale for Outsourcing 349

Financial Savings 349 Strategic Focus 351 Advanced Technology 352 Improved Service 352 Specialized Expertise 352 Organizational Politics 353 Benefits to Canada 353

Risks and Limitations of Outsourcing 353 Projected Benefits versus Actual Benefits 354 Service Risks 354 Employee Morale 354 Security Risks 356 Reduced Value 356

Management of Outsourcing 357 Selecting the Vendor 357 Negotiating the Contract 359 Monitoring the Arrangement 360 Policy Options to Limit Outsourcing 362

Summary 362 Key Terms 362 Discussion Questions 362 Exercise 363 Case Study: Outsourcing at Texas Instruments Canada 363 References 363

Chapter 14 HR Assessment and Analytics 367 Chapter Learning Outcomes 367 Keeping Score with the Scorecard 368 Workforce Analytics 368

CONTENTS

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The Importance of Evaluating HRM 369 Resistance 370 Rationale 371

The 5C Model of HRM Impact 373 Compliance 373 Client Satisfaction 373 Culture Management 377 Cost Control 379 Contribution 381

How HR Contributes to Organizational Performance 381 Financial Measures 381 Measures of Managerial Perceptions of Effectiveness 383

Approaches to Measuring HRM Practices 384 Cost–Benefit Analysis 384 Utility Analysis 385 Benchmarking 386 The HR Scorecard 388 Measuring the Worth of Employees 389 Universality of Best Practices 390 Separation of Cause and Effect 392 Successful Measurement 393 Reporting to Boards of Directors and Shareholders 396

The Future of HR Analytics 396 Summary 398 Key Terms 398 Web Links 398 Discussion Questions 398 Exercise 399 Case Study 1: Talent Management and Workforce Analytics at Frito-Lay 399 Case Study 2: Measuring Culture to Support Growth at CMA 400 References 401

Glossary 407

Index 412

CONTENTS

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ABOUT THE SERIES

The management of human resources has become the most important source of innova- tion, competitive advantage, and productivity. More than ever, human resources man- agement (HRM) professionals need the knowledge and skills to design HRM policies and practices that not only meet legal requirements but also are effective in supporting organizational strategy. Increasingly, these professionals turn to published research and books on best practices for assistance in the development of effective HR strategies. The books in the Nelson Series in Human Resources Management are the best source in Canada for reliable, valid, and current knowledge about practices in HRM.

The texts in this series include:

• Managing Performance through Training and Development • Management of Occupational Health and Safety • Recruitment and Selection in Canada • Strategic Compensation in Canada • Strategic Human Resources Planning • Industrial Relations in Canada The Nelson Series in Human Resources Management represents a significant develop-

ment in the field of HRM for many reasons. Each book in the series is the first and now best-selling text in the functional area. Furthermore, HR professionals in Canada must work with Canadian laws, statistics, policies, and values. This series serves their needs. It is the only opportunity that students and practitioners have to access a complete set of HRM books, standardized in presentation, which enables them to access information quickly across many HRM disciplines. Students who are pursuing the HR professional designation through their provincial HR associations will find the books in this series invaluable in preparing for the knowledge exams. This one-stop resource will prove useful to anyone looking for solutions for the effective management of people.

The publication of this series signals that the HRM field has advanced to the stage where theory and applied research guide practice. The books in the series present the best and most current research in the functional areas of HRM. Research is supple- mented with examples of the best practices used by Canadian companies that are leaders in HRM. Each text begins with a general model of the discipline, and then describes the implementation of effective strategies. The books serve as an introduction to the functional area for the new student of HR and as a validation source for the more experienced HRM practitioner. Cases, exercises, and endnotes provide opportunities for further discussion and analysis.

As you read and consult the books in this series, I hope you share my excitement in being involved and knowledgeable about a profession that has such a significant impact on the achievement of organizational goals, and on employees’ lives.

Monica Belcourt, PhD, FCHRL Series Editor March 2018

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ABOUT THE AUTHORS

Monica Belcourt Monica Belcourt is the founding director of the School of Human Resources Management at the Faculty of Liberal Arts and Professional Studies at York University. Her writing is grounded in the experience she gained as director of personnel at CP Rail, as director of employee development at the National Film Board, and as a functional HR specialist for other organizations. Dr. Belcourt alternated working in HRM with graduate school, earning an MA in psychology, an MEd in adult education, and a PhD in management. In 2010 she was awarded the designation of Fellow Certified Human Resource Leader (FCHRL), a lifetime achievement award in recognition of extraordinary contributions to the profession. She has taught HRM at Concordia University, Université du Québec à Montréal (UQAM), McGill University, and York University. At York, she founded and managed the largest undergraduate program in HRM in Canada and Canada’s only executive-style Masters in human resources management. She is the academic editor of the Nelson Series in HRM.

Dr. Belcourt was the founding director of the International Alliance for Human Resources Research (now recreated as HRRI [Human Resources Research Institute] and managed by HRPA), a catalyst for the discovery, dissemination, and application of new knowledge about HRM. Under her leadership, IAHRR launched The Research Forum, a column in Human Resources Professional; the Applied Research Stream at the annual HRPAO conference; and the best theses awards program.

Dr. Belcourt was active in many professional associations and organizations. She was the president of the Human Resources Professionals Association of Ontario (http://www.hrpa.org). She is a frequent commentator on HRM issues for CTV’s Canada AM, CBC, The Globe and Mail, Report on Business Television, Workopolis, and other media.

Mark Podolsky Mark Podolsky is an Assistant Professor at the School of Human Resource Management at York University. Mark received his PhD in Human Resource Management and Organizational Behaviour from the DeGroote School of Business at McMaster University. His research focuses on situational constraints in the workplace, which includes the kinds of management practices and behavioural norms that can influence individual and group level behaviours and outcomes. Mark’s research also explores the relationships between organizational strategy and HR practices, and seeks to develop methods to connect strategic outcomes to HR practices and the management of human capital.

With management experience in the financial sector and in arts organizations, Mark’s research and teaching brings an understanding of many of the issues facing prac- titioners today. In addition to organizational research, Mark has a deep love of music, and prior to his PhD was a tenured professional classical musician in one of Canada's leading symphony orchestras.

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The fundamental premise of this text is that different organizational strategies require different human resources management (HRM) policies and practices. Strategic Human Resources Planning, Seventh Edition, is designed to help human resources (HR) managers plan and make decisions about the allocation of resources for the effective management of people in organizations within a given strategy.

HR planning should be more than just demand and supply forecasting: HR profes- sionals should be business partners in strategy formulation and implementation, and should be concerned with the implications of strategic decisions on HRM practices. A decision to expand internationally affects selection, compensation, and other functional areas. Strategic decisions to merge or downsize have HR implications beyond simple forecasting. All these strategic options will lead to questions about the best types of compensation, selection, and training to ensure the success of the chosen strategy. This text attempts to answer these questions, without neglecting traditional and important HR forecasting processes. It provides tools for HR planning and forecasting and matches corporate strategies with specific HR practices.

// STRUCTURE OF THE TEXT AND CHANGES IN THE SEVENTH EDITION The text is organized to introduce the reader to the concepts of strategy formulation and implementation within an HR context. Chapters 1 to 3 outline the fundamental building blocks of strategic HR with an introduction to the concepts and their links to HR planning, how trends and issues are identified, and how organizations determine whether implementation of strategies, policies, and plans are successful.

Chapter 1 lays the groundwork by introducing the concepts of both corporate and business strategies. We spend some time explaining strategic choices because it is impera- tive that, as HR managers become business partners, they understand commonly used business terms. This will help them to participate fully in strategic discussions and to explain the impact of their HR programs on the organization. Strategy seems to imply that only corporate-wide plans are made, and that these are used to manage and control the various units that exist within an organization. But many large organizations operate several businesses, each with its own strategy. (For example, Alcan Aluminum operates two “divisions” or businesses, one that focuses on primary metals and one that focuses on fabrication. Each has a different business strategy, although the overall corporate strategy is growth.) Two types of business-level strategies are discussed. Because most HR professionals are becoming strategic planning partners, and are playing a critical role in the development of mission, vision, and value statements, we have included material on describing and differentiating these concepts. In the HR world, there is a growing under- standing that human resources provide a competitive advantage. We describe what this means, and distinguish between tangible and intangible assets. We outline the benefits of strategy formulation. A model of strategic HR planning is introduced in this chapter to orient the reader and to provide the structure for the text.

PREFACE

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Chapter 2 continues the introduction to strategy by embedding HRM strategy within an organizational strategic framework. A model of strategic HR planning is intro- duced in this chapter to orient the reader and to provide the structure for the text. As the field of HR develops, many are claiming that the discipline needs to have a theo- retical foundation in order to test and validate new ideas about the best way to manage employees. We introduce three perspectives, which may be in the embryonic stages of testable theories: the resource-based view, the behavioural perspective, and the “theory” of human capital. The rest of the chapter is focused on a description of strategic HR, the reasons HR planning is important, and the ways in which the HR function contributes to the strategic planning process. Coverage of goal attainment is strengthened in this edition. Finally, we conclude with a section that outlines the characteristics of an effec- tive HR strategy.

The environmental factors that influence strategic choice, particularly within an HR context, are discussed in Chapter 3. We look at the sources of information about the envi- ronment and the methods HR strategists use to scan the environment. In this chapter, we have discussed the stages of environmental planning. We have listed the sources of information that are useful for environmental scanning. We have included material about the methods of forecasting, including scenario planning. There is also a section on competitive intelligence. In this edition, there is an emphasis on the expanding role of technology. As we do for every edition, we identify the latest trends in globalization, the labour market, politics and legislation, technology, demography, and culture that will influence the practice of HR. This edition has a new section on Generation Z or iGen. We conclude with a description of how stakeholders influence HR policies.

Chapters 4 to 8 focus on the more traditional aspects of HR planning: forecasting supply and demand. A critical component of strategy is matching employee capabilities with organizational objectives. The ability to assess current skills is a fundamental part of strategic planning for human resources. These chapters provide a comprehensive set of tools that enables the HR professional to develop the numbers and methods needed to support organizational objectives.

Chapter 4 introduces the forecasting process and the general methods that are com- monly used. This edition differentiates this chapter from the subsequent chapters on forecasting HR demand (Chapter 5) and forecasting supply (Chapter 6) by focusing on the forecasting process in general, and its importance in the development of strategic human capital. This edition includes a new section on the relevance of the stock and flow of human capital to the forecasting process. As organizations continue to move toward labour practices that go beyond the constraints of full-time or part-time jobs, this chapter considers how the human capital forecasting process can begin to look at work in terms of tasks that must be performed rather than jobs that must be filled. The chapter then considers the environmental and organizational factors that affect the forecasting process, and closes with a brief discussion of how estimates of demand and supply are brought together to form a basis for instituting or revising HR programs and policies.

Chapter 5 introduces methods for forecasting the demand for human capital. This edition begins with some of the current challenges to demand forecasting, including the high levels of uncertainty in today’s environment as well as the growing volume and complexity of data that is becoming available to organizations. Chapter 5 is roughly organized by the basic categories of demand forecasting, ranging from quantitative methods, to qualitative methods, and finally to methods that combine both quantita- tive and qualitative methods such as simulation. With the growing importance of data in the decision-making process in organizations, this chapter provides examples of basic quantitative methods such as trend analysis and regression, so that students develop an

PREFACE

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understanding of how these methods can be applied in the context of forecasting the demand for human capital. This edition includes new sections on the differences in the types of data and results expected from qualitative versus quantitative analyses, and a sec- tion on simulation as a method to combine qualitative knowledge with quantitative data.

Chapter 6 focuses on the methods for forecasting the supply of human capital. This chapter begins by orienting the reader to the role that supply forecasting plays in the development of a skills gap. This edition also introduces the concept of employee segmentation, where the HR function groups employees based on characteristics that are relevant to the employee experience. Segmentation can increase the size of the rel- evant applicant pool, and potentially decrease turnover. This edition also includes an expanded focus on the use of Markov models and discusses the bullwhip effect in order to understand how to model the flow of human capital.

Managerial succession planning, discussed in Chapter 7, is an important consider- ation for ensuring that the organization has a stock of replacements for its managers. Succession management has evolved from replacement planning for individual execu- tives to the development of talent pools for broad leadership roles aligned with the organization’s strategies. An example of a replacement chart has been included in this chapter. Development techniques such as promotions, job rotations, special assign- ments, and mentoring and coaching are described. The role of employees in their own career development is outlined.

Chapter 8 has been revised to reflect the growing roles of big data and HR analytics in the HR function. The chapter begins with the role of IT in supporting the HR function through various modes of service delivery such as web portals, apps, self-service, and HR information systems. Big data is defined and discussed in terms of the different types of big data, the resources required to support big data, and the ethical challenges emerging from its use. There is also discussion around the limitations to using big data in the context of the HR function. Artificial intelligence is emerging as an important partner to the use of big data, as it helps humans to sort through and model large amounts of data. Workforce analytics are introduced in this chapter as they relate to the development of HR dashboards. Workforce analytics are discussed in more detail in Chapter 14.

Chapters 9 to 13 examine the types of strategic orientations that firms may choose. Company-wide strategies, sometimes referred to as corporate strategies, are focused on overall strategy for the company and its businesses or interests. Examples of corporate strategies include decisions to merge or to establish the organization in international markets. Strategies at this level are usually also focused on long-term growth and survival goals.

We discuss four major decisions facing organizations: restructuring, international operations, mergers and acquisitions, and outsourcing. HR planning is discussed within the overall strategies of restructuring, international initiatives, and mergers. By the end of these chapters, readers will understand how specific strategic decisions can be matched with HR policies and practices.

Chapter 9 introduces the topic of organizational change and its importance to the HR planning process. The chapter begins with a discussion of the competencies that are important for leading change, and the challenges HR departments face in general in bringing about organizational change. Models of organizational changes are introduced, with a focus on two major perspectives around how change is implemented: the planned approach, and the emergent approach. Despite the apparent differences in these two approaches, they both benefit from the principles of a learning organization. This edi- tion closes the chapter with a discussion of the role of the HR function in bringing about successful organizational change.

PREFACE

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Chapter 10, written by Professor Terry Wagar of Saint Mary’s University, discusses restructuring and downsizing. Starting with definitions of these two terms, this chapter presents different strategies for reducing the workforce. The reasons for downsizing are delineated. The consequences of reducing the workforce are explained, including sur- vivor syndrome and the impact on financial indices. We include a debate on ethical considerations of downsizing and an introduction to other impacts of restructuring, including corporate reputation, organizational learning, and employee safety. New to this edition is a discussion of the future of work, including artificial intelligence and job loss. This chapter offers suggestions for effective downsizing. The chapter concludes with a discussion on the effect of downsizing on HR issues such as the psychological contract and labour relations.

Chapter 11 extends the principles of HR planning from the domestic context to a global focus. The chapter begins with a discussion of the challenges of managing an international workforce. This edition includes increased discussion around the different types of international assignments, and includes new sections on issues of human capital demand and supply in an international context.

In Chapter 12, we examine another high-growth area: mergers and acquisitions (M&As). An acquisition occurs when one company acquires another, whereas a merger is typically seen as two organizations merging to achieve economies of scale. Both acquisitions and mergers lead to issues of integration of common functions, elimina- tion of duplication or underproductive units, and a meshing of cultures and practices. We include a section on cultural assessment and classification that should enable HR managers to make better decisions about possible fit between two organizations contem- plating a merger. This chapter outlines the benefits of M&As, and compares the alleged benefits against the real effectiveness of this strategy. HR has a significant role to play, as mergers often fail because HR issues are not managed in a timely and effective manner. There is a new section on making mergers successful.

The hot issue of outsourcing is explored in Chapter 13, with a thorough analysis of the reasons, risks, and benefits of the outsourcing decision. The benefits are not always realized, so the chapter offers suggestions for managing the outsourcing arrangement. We include a new section on the issues with the providers of outsourcing. We also dis- cuss the evolving consumer backlash to outsourcing.

A critical part of strategic planning is the ability to measure results and to determine if goals have been met. Chapter 14, “HR Assessment and Analytics,” provides information about the importance of not only measuring HR activities and programs, but also using data (metrics) to predict employee behaviour. Because HR is a young field, we are prone to adopt emerging trends, and so we describe how to distinguish a fad from an effective HR program. This chapter provides a framework for understanding how HR processes, practices, and policies can affect organizational outcomes. This edition strengthens the content on HR analytics. The chapter outlines the many ways to evaluate effectiveness, and which areas to measure. There is a need to establish universal metrics of measure- ment and prediction. We include a list of the characteristics of successful measurement.

Features retained from the previous edition of this text include chapter learning outcomes, extensive use of Canadian examples, use of figures and tables to convey infor- mation efficiently, margin definitions of key concepts, chapter summaries, and listings of key terms.

New content in the Seventh Edition includes new chapter opening vignettes, as well as new “HR Planning Today” boxes to put issues in a real-life context, and new “HR Planning Notebook” boxes to highlight key points that flow from the chapter. End-of- chapter material includes some new discussion questions, exercises, and case studies.

PREFACE

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NEL xxvii

As a part of the process needed to earn a professional HR designation, granted by the HR provincial associations, applicants must undergo two assessments: one is a knowledge-based exam, and the second assessment is based on experience. Because the competencies required for the knowledge exams may differ by province, we have not provided lists or links in this edition. Those interested in obtaining an HR designation should consult the HR Association in their province.

// INSTRUCTOR RESOURCES The Nelson Education Teaching Advantage (NETA) program delivers research-based instructor resources that promote student engagement and higher-order thinking to enable the success of Canadian students and educators. Visit Nelson Education’s Inspired Instruction website at www.nelson.com/inspired to find out more about NETA.

The following instructor resources have been created for Strategic Human Resources Planning, Seventh Edition. Access these ultimate tools for customizing lectures and pre- sentations at www.nelson.com/instructor.

NETA TEST BANK This resource was prepared by Catherine Fitzgerald, Okanagan College. It includes over 850 multiple-choice questions written according to NETA guidelines for effective con- struction and development of higher-order questions. Also included are true/false and short-answer questions.

The NETA Test Bank is available in a new, cloud-based platform. Testing Powered by Cognero® is a secure online testing system that allows instructors to author, edit, and manage test bank content from anywhere Internet access is available. No special instal- lations or downloads are needed, and the desktop-inspired interface, with its dropdown menus and familiar, intuitive tools, allows instructors to create and manage tests with ease. Multiple test versions can be created in an instant, and content can be imported or exported into other systems. Tests can be delivered from a learning management system, the classroom, or wherever an instructor chooses. Testing Powered by Cognero for Strategic Human Resources Planning can also be accessed through www.nelson.com/ instructor.

NETA POWERPOINT Microsoft® PowerPoint® lecture slides for every chapter have been adapted by Carol Ann Samhaber, Algonquin College. There is an average of 33 slides per chapter. The slides provide a basic outline of the chapter and contain key figures, tables, and pho- tographs from Strategic Human Resources Planning. NETA principles of clear design and engaging content have been incorporated throughout, making it simple for instructors to customize the deck for their courses.

IMAGE LIBRARY This resource consists of digital copies of figures, short tables, and photographs used in the book. Instructors may use these images to customize the NETA PowerPoint® or create their own PowerPoint presentations.

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NETA INSTRUCTOR GUIDE The Instructor’s Manual to accompany Strategic Human Resources Planning, Seventh Edition, has been prepared by Lisa Bering, Humber College. This manual contains learning outcomes, chapter summaries, suggested classroom activities, case studies, and additional exercises.

MINDTAP Offering personalized paths of dynamic assignments and applications, MindTap for Strategic Human Resources Planning is a digital learning solution that turns cookie-cutter into cutting-edge, apathy into engagement, and memorizers into higher-level thinkers. MindTap enables students to analyze and apply chapter concepts within relevant assignments, and allows instructors to measure skills and promote better outcomes with ease. A fully online learning solution, MindTap combines all student learning tools—readings, multimedia, activities, and assessments—into a single Learning Path that guides the students through the curriculum. Instructors personalize the experience by customizing the presentation of these learning tools to their students, even seam- lessly introducing their own content into the Learning Path.

// STUDENT ANCILLARIES MINDTAP Stay organized and efficient with MindTap—a single destination with all the course mate- rial and study aids you need to succeed. Built-in apps leverage social media and the latest learning technology. For example:

• ReadSpeaker will read the text to you. • Flashcards are pre-populated to provide you with a jump start for review—or you

can create your own. • You can highlight text and make notes in your MindTap Reader. Your notes will

flow into Evernote, the electronic notebook app that you can access anywhere when it’s time to study for the exam.

• Self-quizzing allows you to assess your understanding. Visit http://www.nelson.com/student to start using MindTap. Enter the Online

Access Code from the card included with your text. If a code card is not provided, you can purchase instant access at NELSONbrain.com.

We hope that this book provides an enjoyable learning experience.

Monica Belcourt Mark Podolsky March 2018

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NEL xxix

ACKNOWLEDGMENTS

The authors wish to acknowledge the contributions of Terry Wagar of Saint Mary’s University. Professor Wagar drew on personal research and experience to write an out- standing chapter on downsizing and restructuring.

The authors wish to thank the following reviewers who made helpful comments for this revision: Carolyn Capretta, McMaster University; Christine Coulter, Queen’s University; Leanne Floden, Northern Alberta Institute of Technology; Laura Gover, Vancouver Island University; Joanne Leck, University of Ottawa; Frank Miller, Ryerson University; Melanie Peacock, Mt. Royal University; and Chris Roubecas, Southern Alberta Institute of Technology. We would also like to acknowledge many others who assisted in reviewing earlier editions of this book. They are Gordon Barnard, Durham College; John Hardisty, Sheridan College; Grace O’Farrell, University of Winnipeg; Sheldon Shiewitz, Centennial College; Michelle White, Fanshawe College; Jerome Collins, St. Clair College; Lisa Guglielmi, Seneca College; Ruthanne Krant, Georgian College; Ted Mock, University of Toronto; and David Parkes, Grant MacEwan University.

The team at Nelson contributed enormously through their professionalism and dedication. Jackie Wood, in particular, has been tremendously helpful in the develop- mental process for the series. We would also like to thank content manager Elke Price, permissions coordinator Daniela Glass, permissions researcher Karen Hunter, produc- tion manager Shannon Martin, and freelance copy editor Karen Rolfe.

We are grateful to our students in the HR graduate program, especially those in the HRM Effectiveness class, for their research projects on strategic issues, and in the undergraduate course Human Resources Planning, for their thoughtful comments about the contents of the book. Above all, we wish to thank our colleagues across Canada who have supported the HRM Series by contributing their research, their experience, and their ideas to enable HRM students to read about the HRM landscape in this country.

Finally, we continue to owe much of our career success to the support of our fami- lies. I, Monica, thank Michael, my husband, who has been a constant supporter of my professional career. I, Mark, thank my wife, Mary Jo, for her guidance and inspiration.

Monica Belcourt York University

Mark Podolsky York University

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Discuss why managers need to examine the human resources implications of their organizational strategies.

• Discuss why human resources managers need to understand strategy. • Understand the various terms used to define strategy and its processes. • Describe organizational strategies, including restructuring, growth, and

maintenance. • Define business strategy and discuss how it differs from corporate strategy. • Discuss the steps used in strategic planning. • List the benefits of strategic planning.

STRATEGIC MANAGEMENT

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// A NEED FOR STRATEGIC HRM Read any Canadian newspaper and you will see stories such as these:

• Amazon buys Whole Foods and will pose new threats to the grocery retail sector.

• FedEx closes retail stores. • Toys R Us files for bankruptcy. • The jobs of hundreds of support staff in Winnipeg hospitals are eliminated. • Strawhouse, a developer of digital marketing tools, based in Kelowna, BC,

grew 3000 percent in two years.

The common theme in these stories is the adoption of a strategy that has serious HRM implications. In most cases, unless the HRM strategy, for example, internation- alization or downsizing, is appropriately formulated and skillfully implemented, the success of the organizational strategy is at risk.

Hudson’s Bay Company (HBC) is Canada’s oldest organi- zation, established in 1670 as a fur trading company. It has survived for over 300 years by adapting its strategy to changing environmental conditions, both threats and opportunities. The following condensed history will dem- onstrate that it has experienced nearly all of the strategic options described in this chapter.

In 1821, HBC merged with its main rival, the North West Company. The declining demand for fur influenced the decision to change the fur trading posts to retail stores, and HBC launched its department store business in 1913. The company also had a diversification strategy and at various times throughout its history sold liquor, salmon, coffee, tobacco, and real estate. The economic downturn of the 1980s caused HBC to rethink its priorities and, like many other firms, return to its core business. Non-retail businesses were sold off and retail businesses added. The pace of retail acquisition increased with takeovers of Zellers (1978), Simpsons (1978), Fields (1978), Robinson’s (1979), Towers/Bonimart (1990), Woodward’s (1994), and Kmart Canada (1998) following in the tradition of Cairns (1921), Morgan’s (1960), and Freiman’s (1971). Even HBC’s subsidiaries had to adopt new business-level strategies. For example, when Walmart entered the Canadian retail market in 1994, competing head-on with Zellers, the latter had to reposition itself from a low-cost business strategy to a differentiation strategy by selling exclusive

and slightly upscale products such as Martha Stewart Everyday. Other retailers, such as Eaton’s and Consumer Distributors, did not make good strategic decisions, and went bankrupt.

In 2005, HBC adopted a corporate growth strategy and a business-level strategy of differentiation coupled with low cost by opening new store concepts such as Home Outfitters and DealsOutlet.ca. Online shopping was introduced in 2000. In 2006, American billionaire Jerry Zucker bought HBC. Thanks to HBC’s talent management and succession planning systems in place, HBC was able to quickly generate a new executive team from within. When Zucker died, his estate sold HBC to NRDC (owners of the Lord & Taylor department store). The 2008–2009 economic recession again forced HBC to focus on its department store and specialty store businesses to drive growth. In 2011, HBC decided to spin off 220 stores of its weakest chain, Zellers, to Target for $1.825 billion. Currently, HBC is focusing on the luxury market, with the acquisition of other retailers such as Lord and Taylor and Saks Fifth Avenue.1 The organization has acquired one retailer in Germany and another in Belgium. Currently it has 480 stores and 66 000 employees.

The HBC example highlights the strategic decisions made by organizations in their attempts to survive and become profitable. Each strategic choice has implications for the management of human resources.

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NEL 3CHAPTER 1 Strategic Management

We have written this book to provide answers to questions about the proper align- ment of HR policies with organizational strategies. Managers who have implemented any kind of change within their organizations realize the importance of matching HRM practices with organizational goals. There is a growing acknowledgment that the strategic management of people within organizations affects important organizational outcomes such as survival, profitability, customer satisfaction levels, and employee performance. Our goal is to help readers understand strategy and the HRM programs and policies that enable organizations to achieve that strategy. We discuss strategy at some length, because HR professionals have been criticized for not understanding nor using the language of business when discussing the value of HR programs. HR managers have to use strategy terms to show how their HR practices support organizational strategies.

STRATEGY Strategy is the formulation of organizational objectives, competitive scopes, and action plans for gaining advantage.2 Strategy is the plan for how the organization intends to achieve its goals. The means it will use, the courses of action it will take, and how it will generally operate and compete constitute the organization’s strategy.3

We have presented one definition of strategy, but there are many others. A sampling is found in HR Planning Notebook 1.1.

The top management team determines strategy through a process of environmental analysis (which is discussed in Chapter 3) and discussions. The strategy and objectives developed by senior management are then approved by the board, and negotiated and revised as they filter throughout the organization. The organization then develops plans, which include HRM programs, to achieve those goals. This does not suggest, however, that strategic planning is a unilateral or one-time process. Various organiza- tional outcomes provide a feedback loop to the strategic planning process led by senior

Strategy The formulation of organizational objectives, scopes, and action plans for gaining advantage

HR PLANNING NOTEBOOK 1.1

DESCRIPTIONS OF STRATEGY

Concepts of strategy are numerous. Here is a guide to some common terms used throughout the text and in the organizations where you work:

Strategy: A declaration of intent

Strategic intent: A tangible corporate goal; a point of view about the competitive positions a company hopes to build over a decade

Strategic planning: The systematic determination of goals and the plans to achieve them

Strategy formulation: The entire process of conceptu- alizing the mission of an organization, identifying the strategy, and developing long-range performance goals

Strategy implementation: Those activities that employees and managers of an organization undertake to enact the strategic plan and achieve the performance goals

Objectives: The end, the goals

Plans: The product of strategy, the means to the end

Strategic plan: A written statement that outlines the future goals of an organization, including long-term performance goals

Policies: Broad guidelines to action, which establish the parameters or rules

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management, who will also continuously monitor the dynamic environment to make adjustments to the strategy.

Strategic planning requires thinking about the future. In a perfect world, some experts believe that the strategic planner would establish an objective for 5 to 10 years and then formulate plans for achieving the goals. However, other experts do not per- ceive strategy in such a simplistic, linear fashion. They assert that the future is not that predictable. Planning for the long term (i.e., more than 10 years) is difficult and would be more appropriately judged as a best guess. For example, the nuclear power industry in Japan could not have predicted the 2011 Tohoku earthquake and tsunami, nor could financial analysts have predicted the 2008 economic meltdown on Wall Street. Besides catastrophic events, there are more typical shocks to the competitive environment that trigger a change in strategy, such as changing market conditions, new technology, emerging markets, and new moves of competitors etc. Some other organizational events that precede strategic change are outlined in HR Planning Notebook 1.2.

Because of the unpredictability of trigger events, many planners look at a rela- tively shorter period of time, a more predictable term of three to five years. Because of the uncertainty, their plans are formulated to be somewhat flexible so that they can respond to changes in the environment. Thus, strategic planning must be viewed as a dynamic process, moving, shifting, and evolving as conditions warrant changes. The process of subtly redirecting strategy to accommodate these changes is called logical incrementalism.4 Rather than calling for a straight path to the goal, this strategy calls for a series of actions to react to changes in competitor actions or new legislation. Another name for this reactive process is emergent strategy. This cumulative process can look like a dramatic revolutionary change to those on the outside, but to those on the inside, the strategy has been incrementally implemented.5 Firms can wait pas- sively for these changes to occur and then react, or they can anticipate these moves and adopt a proactive stance.

Writers on strategy sometimes distinguish between intended strategy and realized strategy. The intended strategy is the one that was formulated at the beginning of the period. The realized strategy is, of course, what actually happened.

Figure 1.1 illustrates these various concepts of strategy. You may be asking: Why develop a strategy if the organization must continually

change it to accommodate unforeseen changes? Think of strategy as a game plan or a flight plan. A pilot’s flight plan looks relatively simple: fly from Ottawa to Edmonton. However, before departure, he or she is aware of the environment and the capacities (or competencies) of the plane. On the basis of these external and internal factors, the pilot develops a strategy for a safe flight. While on the voyage, however, environmental changes, such as strong winds or a blizzard, may require a change of plans. Even internal factors, such as a passenger suffering a heart attack, may necessitate such a change. But the plane and/or its passengers will somehow, at some time, arrive in Edmonton. This is what is meant by incremental adjustments to the strategy, adjustments that do not require changing the focus of the desired result. There is no strategy so finely crafted that adjustments aren’t needed. The general rule is that, unless there is a crisis, it should not be necessary to make quantum leaps in strategies. Thus, these strategies should withstand the test of time and be durable for several years.

A good strategy recognizes the complexity of these realities. To be effective, strategic management anticipates future problems, provides an alignment with external contin- gencies and internal competencies, recognizes multiple stakeholders, and is concerned with measurable performance6—just like the flight plan.

Emergent strategy The plan that changes incrementally due to environmental changes Intended strategy The formulated plan Realized strategy The implemented plan

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HR PLANNING NOTEBOOK 1.2

TRIGGERING EVENTS TO STIMULATE A CHANGE IN STRATEGY

Here are some common examples of events that trigger a change in strategy within organizations:

• New CEO: May ask questions about the assump- tions underlying the strategy and challenge the status quo

• Threat of a change in ownership: Similarly to a change in CEO, new owners (or a threat of new ownership) cause a reconsideration of the effec- tiveness of the strategy

• External intervention: Examples are a customer who accounts for a large portion of sales defecting

to another company or lodging a serious complaint about a defect

• Performance gap: When sales or profit targets are not being met, most organizations will review the strategy

• Strategic inflection point: Rapid changes in tech- nology (for example, when Yellow Pages had to go digital), customer preferences, or industry regula- tions will trigger a change in strategy

Sources: Adapted from S.S. Gordon, W.H. Stewart, R. Sweo, and W.A. Luker, “Convergence versus Strategic Reorientation: The Antecedents of Fast-Paced Organizational Change,” Journal of Management, Vol. 26, No. 5 (2000), pp. 911–945; and T.L. Wheelen, and J.D. Hunger, Concepts in Strategic Management and Business Policy, 11th edition, 2008, Toronto: Prentice Hall, p. 19.

Emergent Strategy Created from new ideas and conditions

Realized Strategy Executed representing some planned and some emergent strategy

Discarded Strategy Deemed inappropriate due to changing circumstances

Intended Strategy The agreed-upon strategy arrived at through the formal planning process

FIGURE 1.1

THE REALITY OF THE STRATEGIC PROCESS

Adapted from the work by Henry Mintzberg. Used with permission.

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Strategic Human Resources Planning NEL6

The fundamental premise of this book is that different organizational strategies demand different HR policies and practices. Therefore, before we can discuss HRM strategies, you need to understand the different types of strategies that organizations formulate and implement.

// STRATEGIC TYPES Many executives and senior managers put in an incredible number of hours forging the strategy for the firm, and they believe the strategy they developed, with much sweat and tears, is unique to their organizations. In one sense, pure, unique organiza- tional strategies do exist, because organizations are extremely complex and no two are identical. In another sense, they do not, because it is possible to group strategies into categories or generic types. Just as we can group our friends into personality categories of introvert and extrovert, so we can group organizations by strategy. By virtue of their simplicity, these typologies, or classification schemes, aid our understanding. The more we add variables to approximate the reality of an organization, the more unwieldy the typology becomes.7 Organizational theorists use classification schemes not only to help us understand how organizations work but also to enable us to test the concepts, leading us to better information about how to manage.

These identifiable, basic strategies can be classified into (1) corporate strategies and (2) business strategies.

CORPORATE STRATEGIES Company-wide strategies, sometimes referred to as corporate strategies, are focused on overall strategy for the company and all of its businesses or interests. Examples of corporate strategies include decisions to compete internationally or to merge with other companies. Strategies at this level are usually focused on long-term growth and survival goals and will include major decisions such as the decision to acquire another company.

Grouped within corporate strategies are three options: restructuring, growth, and stability.

RESTRUCTURING STRATEGIES

When an organization is not achieving its goals, whether these are business goals of profitability or social goals such as helping rehabilitate prisoners, corporate strategy becomes one of trying to deal with the problem. Restructuring options include turn- around, divestiture, liquidation, and bankruptcy.

TURNAROUND A turnaround strategy (sometimes called a retrenchment strategy) is one in which managers try to restore money-losing businesses to healthy profitability or gov- ernment agencies to viability. Turnaround methods include getting rid of unprofitable products, imposing layoffs, making the organization more efficient, or attempting to reposition it with new products. For example, many cable companies were once near bankruptcy and have now turned around. See also HR Planning Today 1.1 for a history of the turnaround efforts of McDonald’s.

Corporate strategies Organizational-level decisions that focus on long-term survival

Turnaround strategy An attempt to increase the viability of an organization

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DIVESTITURE Divestiture refers to spinning off a business as a financially and mana- gerially independent company or selling it outright.8 For example, Nokia divested its smartphone business to Microsoft. Here in Canada, the private equity fund NRDC acquired Hudson’s Bay for roughly $1.1 billion in 2008. In 2011, it divested one of HBC’s weakest chains, Zellers, which was sold to Target for more than $1.8 billion, much higher than the price NRDC paid for HBC.9

LIQUIDATION The least attractive alternative is liquidation, in which plants are closed, employees released, and goods auctioned off. There is little return to shareholders under this option. Nevertheless, an early liquidation may allow some resources (including human resources) to be salvaged, whereas a bankruptcy does not. Jacobs, a fashion retailer, and Radio Shack are recent examples of liquidation.

BANKRUPTCY Bankruptcy occurs when a company can no longer pay its creditors, and, usually, one of them calls a loan. The company ceases to exist, and its assets are divided among its creditors. The list of companies that have filed for bankruptcy is long and includes CanWest, Quebecor, and Sears.

HR PLANNING TODAY 1.1

TURNAROUND AT MCDONALD’S

The McDonald’s burger chain has, for several decades, been a success story. Every year saw increases in out- lets, people served, profits, and shareholder value. Today, 375! 000 McDonald’s employees serve about 69 million people daily in 36 900 outlets in 120 countries. Many different strategies led to this success.

One effort focused on making its food healthier through continuous innovation. It introduced premium salads in 2003, snack wraps in 2006, and real-fruit smoothies and frappés in 2010. Related to these intro- ductions was its switch to trans fat–free cooking oil for french fries and the use of organic milks. The company also introduced a food and nutrition website, and created a mobile app that allows customers to calculate the nutrients in their meal choices.

Another effort attempted to tap regional food inter- ests. The company has McArabias (grilled chicken in Arabic bread) in the Middle East, Shogun Burgers (teriyaki

pork) in Hong Kong, McShawarmas (kosher meat) in Israel, Bulgogi Burgers in South Korea, and McSpicy Paneer in India.

A third attempt was to diversify; McDonald’s added high-margin McCafé coffees in 2009 and Chipotle BBQ in 2011 to broaden its customer base.

Finally, as consumers were facing the economic recession, McDonald’s boosted its low-price dollar-menu items, which included a double cheeseburger or a hot fudge sundae. At a recent presentation at Ryerson Uni- versity, the Canadian CEO admitted to making mistakes such as introducing too many products (menu creep). For example, a launch of custom made meals (“Create your taste”) resulted in wait times of seven minutes, compared to two minutes for its fast-food bestsellers (fries, burgers, nuggets) McDonald’s decided to focus on a core item: coffee. It now controls 11 percent of the brewed coffee market in Canada.

Sources: Adapted from www.canadianbusiness.com/companies-and-industries/mccomeback, retrieved November 17, 2014; Olive, D. “Don’t count the behemoth out yet,” The Toronto Star, December 12, 2014; D. Goold, “McDonald’s Woes a Matter of Taste,” The Globe and Mail, November 28, 2002, p. B9; “McDonald’s Said Ready for More Restructuring,” The Globe and Mail, March 24, 2003, p. B1; and www.economist.com/blogs/schum- peter/2011/06/fast-food-and-cultural-sensitivity; and -company fact sheets, www.mcdonalds.com, retrieved July 26, 2011.

Divestiture The sale of a division or part of an organization Liquidation The termination of a business and the sale of its assets Bankruptcy A formal procedure in which an appointed trustee in bankruptcy takes possession of a business’s assets and disposes of them in an orderly fashion

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Restructuring strategies, like growth strategies, have profound effects on human resources issues, such as managed turnover, selective layoffs, transfers, increased demands on remaining employees, and renegotiated labour contracts. These issues are described in Chapter 10.

GROWTH STRATEGIES

Many organizations in the private-sector target growth as their number-one strategy. By this they mean growth in revenues, sales, market share, customers, orders, and so on. To a large extent, the implications of a growth strategy for HR practices are profound. A firm in a growth stage is engaged in job creation, aggressive recruitment and selec- tion, rapidly rising wages, and expanded orientation and training budgets, depending on how the organization chooses to grow. Amazon and Alibaba are good examples of companies with growth strategies.

Growth can be achieved in several ways: incrementally, internationally, or by mergers and acquisitions.

INCREMENTAL GROWTH Incremental growth can be attained by expanding the client base, increasing the products or services, changing the distribution networks, or using technology. Procter & Gamble uses all these methods:

• Expanding the client base (by introducing skin-care lotion and hair condi- tioner for babies)

• Increasing the products (by adding Pringles potato chips to a product mix of cleaning and health care products)

• Changing the distribution networks (by adding drugstores to grocery stores) • Using technology to manage just-in-time customer purchasing

INTERNATIONAL GROWTH Seeking new customers or markets by expanding internationally is another growth option. Operating a business in a foreign country, particularly one that is not in North America or Europe, may be challenging for the Western HR manager. The HR implications for an international strategy are described in Chapter 11.

MERGERS AND ACQUISITIONS Quantum leaps in growth can be achieved through acquisi- tions, mergers, or joint ventures. An acquisition occurs when one company buys another, whereas a merger typically is seen as two organizations merging to achieve economies of scale. Acquisitions and mergers have an obvious impact on HR: they eliminate the duplication of functions, meld benefits and labour relations practices, and, most importantly, create a common culture. The complexity of merging two companies is outlined in Chapter 12.

STABILITY STRATEGIES

Some organizations may choose stability over growth. For many reasons, some executives, particularly small business owners in relatively stable markets, wish to maintain the status quo. They do not wish to see their companies grow. The executive team is content to keep market share, doing what it has always been doing. HRM practices remain constant,

Acquisition The purchase of one company by another Merger Two organizations combine resources and become one

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NEL 9CHAPTER 1 Strategic Management

as they are presumed to be effective for current strategy. Others see this as a temporary strategy (“Pause and proceed with caution”) until environmental conditions are more favourable for growth. Or perhaps the organization grew very rapidly, and needs time to manage all the changes. Both Microsoft and Apple had rapid growth, and are now growing more slowly. We have not included chapters on stability strategies, because the HRM issues would, by definition, be subsumed under another generic strategy.

Executives in other companies, recognizing that a current profitable situation will not last forever, choose to milk the investment. This harvest strategy can also be seen as a retrenchment strategy, because no investment or efforts will be made to make the business grow; therefore, the goal will be restructuring.

Businesses can pursue several strategies over time or concurrently. Read HR Planning Today 1.2 about the strategies implemented by Cara Operations.

Acquisitions typically achieve economies of scale.

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HR PLANNING TODAY 1.2

MULTIPLE STRATEGIES

The mission statement of Cara Operations declares that its aim is to be Canada’s leading integrated restaurant company. Cara owns or controls food outlets such as Harvey’s, Swiss Chalet, and Milestones Grill and Bar. Cara is an example of a company employing multiple corporate strategies—through acquisition, divestiture, and new concept development— to achieve increased sales and profitability.

• Acquisitions: Cara began an aggressive acquisi- tions strategy in 1999 when it bought 61 percent of Kelsey’s, a Canadian company that owned 74 restaurants including Kelsey’s, Montana’s, and Outback. In 2002, Cara bought the Second Cup coffee chain and acquired a 74 percent stake in Milestones, a chain of upscale restaurants.

(continued )

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Strategic Human Resources Planning NEL10

BUSINESS STRATEGIES We discussed corporate strategy as corporate-wide plans used to manage and control the various units that exist within an organization. But many large organizations operate several businesses under the same or different names, and each of these might have its own strategy. For example, Alcan Aluminum operates two “divisions” or businesses, one that focuses on primary metals and one that focuses on fabrication. Each has a different business strategy, although the overall corporate strategy is growth.

Business strategy focuses on one line of business (in a diversified company or public organization), while corporate strategy examines questions about which competitive strategy to choose as a multi-business corporation. Corporate strategies focus on long- term survival and growth. Business strategy concerns itself with how to build a strong competitive position. As Thompson and colleagues note, business strategy is the action plan for a single line of business to gain competitive advantage.10

Corporate strategies and business strategies are differentiated in the following ways. Corporate strategies are concerned with questions such as these: Should we be in busi- ness? What business should we be in? Business strategies are concerned with questions such as these: How should we compete? Should we compete by offering products at prices lower than those of the competition or by offering the best service? Business strategy is concerned with how to build a competitive position, and with the best way to compete in that line of business. Air Canada was struggling with its business strategy when it attempted to segment the market by creating a series of sub-brands—discount, high end, and charter. The discount airline Zip and then Rouge were created to compete directly with WestJet. Businesses try to demonstrate to the customer that their product or service is better than their rivals’ because they have lower prices or more innovative services.

We will spend some time describing the strategic planning process, because HR pro- fessionals are expected to understand the language of business and to be able to discuss HR programs using the terminology of strategic planning. By learning the models and terms used by managers in business, HR managers will be able to propose or defend HR programs in ways that other managers will understand.

Business strategy Plans to build a com- petitive focus in one line of business

In 2013, Cara merged with Fairfax to acquire con- trol of Swiss Chalet and East Side Mario’s.

• Divestiture: In 2000, Cara sold its Beaver Food Catering business. In 2001, it sold its health care institutional food services division. In 2006, it sold its airport terminal business as well as Second Cup. It divested the Summit division (distribu- tion company) in 2007. In 2010, it sold its air- line catering business, Cara Airline Solutions, to Gategroup, in order to focus its operation on restaurants.

• Growth: Cara has divested its noncore businesses and is focused on its restaurants. The divestitures resulted in cash that will be used to expand the number of restaurants. The growth strategy will see an increase in restaurants and revenues in the years ahead.

• Business strategy: Arjen Melis, president of corpo- rate development at Cara, describes Cara’s busi- ness strategy as “pursuing a portfolio of distinct brands, each of which targets a differentiated consumer segment.”

Sources: Adapted from www.cara.com, retrieved October 7, 2011; “Case Study: Cara Operations Ltd.,” National Post Business, October 2002, pp. 47–50; interview with Arjen Melis, president of Corporate Development, Cara Operations Limited, May 27, 2008; “Cara Operations Selling Airline Catering Business to Swiss Company Gategroup,” The Canadian Press, September 15, 2010; and “Cara Operations Ltd. Financial Profile,” Report on Business Financial Profile, The Globe and Mail, April 21, 2011, p. B1.

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Sanjana bindroo

NEL 11CHAPTER 1 Strategic Management

// THE STRATEGIC PLANNING PROCESS A strategic plan describes the organization’s future direction, performance targets, and approaches to achieve the targets.11 There are many models or approaches to the devel- opment and implementation of strategy. Here is a useful framework of the steps that are involved in strategic planning, which is also illustrated visually in Figure 1.2:12

1. Establish the mission, vision, and values. 2. Develop objectives. 3. Analyze the external environment. 4. Identify the competitive advantage. 5. Determine the competitive position. 6. Implement the strategy. 7. Evaluate the performance.

1. ESTABLISH THE MISSION, VISION, AND VALUES A mission statement articulates the purpose for which, or the reason, an organization exists.13 It also stipulates the value the organization offers for its customers and clients.14 For example, Alibaba’s mission statement is “to make it easy to do business anywhere.”

Many believe that conveying a strong sense of mission is the most important role for the CEO. MacMillan Bloedel changed the company’s position by articulating this mission

Mission statement An articulation of the purpose of the organi- zation and the value it creates for customers

Who are we?

Step 1: Establish the mission,

vision, and values

Where do we want to be?

Step 2: Develop objectives

How will we measure success?

Step 7: Evaluate the performance

What may change?

Step 3: Analyze the external environment

What programs will result in success?

Step 6: Implement the strategy

What is our advantage?

Step 4: Identify competitive advantage

How can we compete?

Step 5: Determine the competitive

position

FIGURE 1.2

THE STRATEGIC PLANNING PROCESS

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Strategic Human Resources Planning NEL12

statement: “The most respected and environmentally responsible forest company in Canada, and an example for others internationally. The public has granted us a license to operate, and they have a right to expect that we will be responsible guardians of their renewable resource.” See HR Planning Today 1.3 to find out if you can recognize some mission statements, and see HR Planning Notebook 1.3 for an exercise to rate your organization’s mission statement.

A vision statement defines the organization’s long-term goals. The distinction between a mission statement and a vision statement is that whereas the mission statement answers the questions “Who are we? What do we do? Why are we here?,” the vision statement answers the question “Where are we going?”15 A good vision statement sets a clear and compelling goal that serves to unite an organization’s efforts. For example, the vision of Alibaba is “We aim to build the future infrastructure of commerce. We envision that our customers will meet, work and live at Alibaba, and that we will be a company that lasts at least 102 years.”16

Values are the basic beliefs that govern individual and group behaviour in an orga- nization. While vision and mission statements answer the questions about what must be accomplished, values answer the question “How must we behave?” For example, 3M Company states, “We will grow by helping our customers win—through the ingenuity and responsiveness of people who care.”

Vision statement Defines an organiza- tion’s long term goals uniting the organiza- tion’s efforts Values The basic beliefs that govern individual and group behaviour in an organization

HR PLANNING NOTEBOOK 1.3

RATE YOUR ORGANIZATION’S MISSION STATEMENT

On a scale of 0–2, with 0 indicating “no,” 1 indicating “somewhat,” and 2 indicating “yes,” evaluate your orga- nization’s mission statement using the following questions:

1. Does the statement describe an inspiring purpose that avoids playing to the self-serving interests of stakeholders?

2. Does the statement describe the organization’s responsibilities to stakeholders?

3. Does the statement define a business domain and explain why it is attractive?

4. Does the statement describe the strategic posi- tioning that the company prefers in a way that helps

(continued )

HR PLANNING TODAY 1.3

THE “PERSON ON A BUS TEST” OF MISSION STATEMENTS

A test of a good mission statement is its ability to pass the “person on a bus test.” In other words, could an average person correctly identify the company after reading its mission statement? Can you guess which companies are attached to these mission statements?

1. X will be a world leader in providing innovative phys- ical and electronic delivery solutions, creating value for our customers, employees and all Canadians.

2. Our mission: to inspire and nurture the human spirit— one person, one cup and one neighborhood at a time.

3. To improve the lives of vulnerable people by mobi- lizing the power of humanity in Canada and around the world.

4. Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environment crisis.

5. To create a better everyday life for many people. 6. To bring inspiration and innovation to every athlete

in the world. Answers on page 26.

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NEL 13CHAPTER 1 Strategic Management

The mission, vision, and value statements of Cara, a leading food service and res- taurant business, are presented in HR Planning Today 1.4.

Sometimes values reflect the founders’ ethics; sometimes they are just words on a poster on the wall. In order to develop employee buy-in to values, invite employees to participate in the elaboration of the organization values as described

to identify the sort of competitive position that it will look for?

5. Does the statement identify values that link with the organization’s purpose and act as beliefs with which employees can feel proud?

6. Do the values resonate with and reinforce the orga- nization’s strategy?

7. Does the statement describe important behaviours and standards that serve as beacons of the strategy and values?

8. Are the standards described in a way that enables individual employees to judge when they are behaving correctly?

9. Does the statement give a portrait of the company capturing the culture of the organization?

10. Is the statement easy to read?

If the total is ten or less, then work is needed to improve the mission statement. Fifteen or more!.!.!.!great job!

Source: Reprinted from Andrew Campbell, “Mission Statement,” Long Range Planning, Vol. 30, No. 6, pp. 931–932, 1997, with permission from Elsevier.

HR PLANNING TODAY 1.4

CARA’S MISSION, VISION, AND VALUE STATEMENTS

Mission

Enhancing stakeholder value and building leading busi- nesses, by maximizing our resources and living our values and principles.

Vision

To be Canada’s leading integrated restaurant company.

Values

Cara’s strength is based on our core values or fundamental beliefs of: the importance of our people, self-responsibility, integrity, a passion for winning and quality.

• People. Cara’s success begins with and endures because of our teammates. We seek out good people, help them grow and improve their skills, appreciate their individuality and contributions, and celebrate their achievements.

• Self-responsibility. Teammates take the initiative to do what needs to be done. We take ownership of our work and results, put forth our best effort, and challenge what needs to be challenged. We hold ourselves accountable, and blame no one.

• Integrity. We are committed to honesty and doing the right thing. We say what we will do, do what we say, and acknowledge when we are wrong or have made a mistake.

• Passion for winning. Winning is much more than luck. It is dedication, desire, enthusiasm for com- petition, risk and hard work. We set our sights on winning, and are passionate about being first in all we do. Winners attract winners.

• Quality. We set high standards, and expect a level of achievement that says “best-in-class,” so that it becomes a state of mind and a way of life. We always give our personal best, and continually raise the bar on excellence.

Source: www.cara.com. Reprinted with permission.

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Strategic Human Resources Planning NEL14

in HR Planning Notebook 1.4. Then these values should be part of every orienta- tion workshop and training course, and be modelled by all employees, especially senior management. The articulation of values serves these important purposes:

• Conveys a sense of identity for employees • Generates employee commitment to something greater than themselves • Adds to the stability of the organization as a social system • Serves as a frame of reference for employees to use to make sense of organiza-

tional activities and to use as a guide for appropriate behaviour

2. DEVELOP OBJECTIVES At this stage, the management team develops short-term objectives to realize its high-level mission, vision, and value. Objectives are an expression, in measurable terms, of what an organization intends to achieve.17 Goals can be classified as hard or soft. Hard goals always

Strong and clear mission and vision statements enable all employees to work toward common goals.

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HR PLANNING NOTEBOOK 1.4

CREATING ORGANIZATIONAL VALUES

1. Invite all employees to offer ideas about the current and the desired values for the organization.

2. Record these without judgments, criticisms, or comments.

3. Have the group identify common themes. 4. Discuss and debate these themes, until there is con-

sensus on a short list of core values. 5. Have subgroups take one value, and develop a defini-

tion of the value and the employee behaviours related to that value.

6. Have groups present their definitions and behaviours, which may be adopted or revised.

7. Appoint one person from each team to incorporate the revisions into a value statement, which is then combined with all the value statements. These then become the company values.

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NEL 15CHAPTER 1 Strategic Management

include numbers, usually relative to performance last year, or to competition. For example, an organization would not state a goal as “increased profitability”; the statement would be action oriented and specific: “to increase profitability in 2022 by 7 percent over 2021.”

HR Planning Notebook 1.5 offers some examples of typical objectives for corpora- tions. Soft goals usually define the targets for the social conduct of the business, and may not always be quantifiable. Soft goals may include being ethical and environmentally responsible, and providing a working environment free of discrimination with oppor- tunities for professional development. One of the most widely applied frameworks for categorizing objectives is the balanced score card model, which divides organizational strategy into four comprehensive perspectives: financial, customer, learning and growth, and internal business process.18 An advantage of this framework, discussed more thor- oughly in Chapter 14, is that it forces each organizational member to think about how his or her actions can contribute to organizational strategy implementation.

3. ANALYZE THE EXTERNAL ENVIRONMENT To achieve the company objectives, managers must be aware of threats and opportunities in the external environment. By scanning and monitoring technology, laws and regulations, the economy, sociocultural factors, and changing demographics, managers can make reactive and proactive changes to the strategic plan. These will be discussed in detail in Chapter 3.

4. IDENTIFY THE COMPETITIVE ADVANTAGE Besides the external environment, managers also need to consider what competitive advantage the organization possesses—that is, what characteristics enable it to generate more value for customers at a lower cost, thereby earning higher rates of profit than its competitors.19 Competitive advantage normally derives from those resources that allow the organization to perform more effectively or efficiently than competitors, which fall into three categories:

• Tangible assets: These are future economic resources that have substance and form from which an organization will benefit. Examples are land, inventory, building, location, cash, and technology.

Competitive advantage The characteristics of a firm that enable it to earn higher rates of profit than its competitors

HR PLANNING NOTEBOOK 1.5

EXAMPLES OF HARD OBJECTIVES

• Profitability • Growth (increase in sales, assets) • Shareholder wealth (dividends plus stock price

appreciation) • Market leadership (market share)

• Utilization of resources (return on investment [ROI] or return on equity [ROE])

• Efficiency (cost per unit produced) • Quality (percentage of waste; percentage

defective)

Source: Reprinted from Andrew Campbell, “Mission Statement,” Long Range Planning, Vol. 30, No. 6, pp. 931–932, 1997, with permission from!Elsevier.

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Strategic Human Resources Planning NEL16

• Intangible assets: These are future economic resources that have been generated from past organizational events. These assets lack substance and form. Exam- ples are human capital, reputation, goodwill, trust, and copyright.

• Capabilities: These are a complex combination of people and processes that rep- resent the firm’s capacity to exploit resources to achieve the firm’s objectives.20 Examples are managerial capabilities, innovative capabilities, marketing capa- bilities, and organizational cultures. These capabilities—the collective skills, abilities, and expertise of an organization—are the outcome of investments in staffing, training, and other HR areas. They are stable over time and are not easy to measure or benchmark; therefore, competitors cannot copy them.21

The resource-based view suggests that for these resources and capabilities to provide a sustained competitive advantage, they must meet four criteria:22

1. They are valuable to the firm’s strategy (they help generate value/reduce cost). 2. They are rare (competitors don’t have them). 3. They are inimitable (they cannot easily be copied by competitors). 4. They can be organized by the firm (the firm can exploit the resources).

The acronym for this view is VRIO. The culture at Southwest Airlines meets all these characteristics, as can be seen in HR Planning Today 1.5. Besides culture, many

Capabilities A complex combination of people and pro- cesses that represent the firm’s capacity to exploit resources that have been specially integrated to achieve a desired result

HR PLANNING TODAY 1.5

CULTURE AS A COMPETITIVE ADVANTAGE

Southwest Airlines’ strategy is that of low cost/low price/ no frills flights, a strategy that has resulted in profits every year since 1974. The organization’s culture is its competi- tive advantage, and possesses all the key characteristics.

Attribute: Valuable

Does the Southwest Airlines culture offer customers something that they value? Yes. The culture results in employees who are productive, flexible, motivated, and willing to accept a low base pay and work long hours. This not only keeps costs down but also improves utilization and on-time delivery performance.

Attribute: Rare

Is Southwest Airlines the only one with this type of culture? If not, is the level of its culture higher than that of competitors? Yes. Each airline has its own culture but only the Southwest culture has inspired employees to care so much about their company that they accept very low base salaries, yet are highly productive and flexible; work almost twice as long

and are more motivated than other airline’s employees; and would rather support the company than the union. The “family” at Southwest is just not found at other airlines.

Attribute: Imitability

Is it easy for other firms to acquire this culture? No. Duplicating this culture is likely to be difficult. Although others may think that they know what makes Southwest employees so motivated, productive, flexible, and dedi- cated, that may not be the case. Also, building the South- west culture may have involved a series of events that are impossible for another firm to re-create.

Attribute: Organize

Is the firm organized, ready and able to exploit the resource? Yes. Southwest’s good position in relation to suppliers and customers enables it to appropriate the value from its extraordinary culture. Barring a major change that diminishes the culture or reverses the relationship, South- west should continue to make money.

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NEL 17CHAPTER 1 Strategic Management

other forms of resources have a potential to meet all four criteria. For example, the innovative capabilities embedded in employees’ specialized expertise, knowledge-sharing routines, and incentive systems for innovation are unique to the organization; and customers’ trust in the brand name, created by a cumulated history of ethical behav- iours of the business and its employees, is not transferable. Some common reasons for these resources and capabilities being a source of sustained competitive advantage are: they are unique, they must be built up over time, they require large-scale investment, and they are socially complex.23 As you can see, human resources play a key role in creating most capabilities.

Resources and capabilities become core competencies when they serve as a firm’s competitive advantage. Core competencies distinguish a company competi- tively and reflect its personality.24 In other words, a core competency is a competi- tively important activity that directly contributes to a company’s strategy.25 The core competency of Southwest Airlines is culture and that of Sony is miniaturization. Walmart’s core competency is its cross-docking inventory management system, which helps it reduce costs. Kimberly- Clark is the best in the world at producing paper-based consumer products, choosing to specialize in category-killer brands (where the name of the product is synonymous with the name of the category—for example, Kleenex).26

Core competencies can be leveraged. For example, when Amazon.com developed the competency to sell books through the Internet, it leveraged this competency to deliver other consumer products. HR managers should be particularly aware of how to contribute to the creation of core competencies.

What if the competencies needed for gaining competitive advantage constantly evolve? In fact, many companies face this difficulty when they continuously compete to seize emerging market opportunity or develop new technology. Dynamic capabilities— the ability to adapt and renew competencies in accordance with changing business environment27—are particularly important in these situations. Being able to regenerate its competencies responsively, Amazon.com started online bookselling in 1998, more than a decade earlier than Borders. Amazon.com was also the first to pioneer digital books with the Kindle e-reader in 2007, three years earlier than Borders. Borders’ lack of dynamic capabilities to regenerate itself, in contrast, was one of the main reasons for its bankruptcy.28

With the information from external environment and internal competence anal- ysis, managers can summarize the conclusions using a SWOT analysis, which is a tool for analyzing a company’s resource capabilities and deficiencies, its market oppor- tunities, and the external threats to its future.29 SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A strength is something that a company does well or an attribute that makes it more competitive. A weakness is something that an organization does poorly, or a condition, such as location, that puts it at a disad- vantage relative to competitors.30 Opportunities and threats are environmental condi- tions external to the firm that may be beneficial or harmful. But an organizational strength can be used to combat an external threat. For example, the very capable legal department (a strength) of Texas Instruments was able to collect nearly $700 million in damages and royalties from Korean and Japanese firms that were infringing on its copyright (a threat). Sometimes an external indicator, such as a rising concern with personal health, may be beneficial for one sector (health clubs) and harmful to others (tobacco companies).31

Core competencies Resources and capa- bilities that serve as a firm’s competitive advantage

Dynamic capabilities The ability to adapt and renew competencies in accordance with changing business environment

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Strategic Human Resources Planning NEL18

5. DETERMINE THE COMPETITIVE POSITION On the basis of the external environment and internal competence, managers then decide the competitive position the company wants to achieve. A company cannot usually compete by being ready to offer any product or service at various prices through mul- tiple channels of distribution. The senior managers must determine who the customers are, where they are located, and what product or service characteristics these customers value. Thus the organization has to create a value proposition—a statement of the fun- damental benefits it has chosen to offer in the marketplace. The value proposition of TD Bank’s Green Line Investor services was very simple: lower-cost transactions than through traditional brokerage channels.

Michael Porter made a major contribution to the field of strategic management by grouping the many ways in which organizations can compete into five generic competi- tive strategies:32

1. Low-cost provider strategy: The goal here is to provide a product or service at a price lower than that of competitors while appealing to a broad range of customers. Fast-food businesses use this strategy almost exclusively. A range of customers from toddlers to seniors consumes the cheap hamburger, a good but basic product with few frills. A company competing on this basis searches continually for ways to reduce costs.

2. Broad differentiation strategy: An organization employing this strategy seeks to differentiate its products from competitors’ products in ways that will appeal to a broad range of buyers. It searches for features that will make its product or service different from that of competitors and that will encourage customers to pay a premium. Thus, Burger King will introduce the Whopper with “frills,” for which people will pay an extra dollar. The goal is to provide a unique or supe- rior value to the buyer in terms of product quality, product features, or service.

3. Best-cost provider strategy: The goal here is to give customers more value for their money by emphasizing a low-cost product or service and an upscale differentiation. The product has excellent features, including several upscale features that are offered at low cost. East Side Mario’s offers hamburgers but presents them on a plate, with extras such as potato salad, served by a waiter in an attractive setting featuring focused lights and art on the walls.

4. Focused or market niche strategy based on lower cost: The goal here is to offer a low- cost product to a select group of customers. Red Lobster uses this approach, selling fish and seafood at reasonable prices to a narrow market segment.

5. Focused or market niche strategy based on differentiation: Here, the organization tries to offer a niche product or service customized to the tastes and require- ments of a very narrow market segment. For example, Pied au Cochon in Montreal sells a $39 hamburger that uses sirloin meat and fois gras.

Under Porter’s schema, business strategy concerns itself with the product and market scope. What particular goods and services are to be provided? What distinguishing features or attractive attributes will characterize these products and services? Typical product characteristics are cost, quality, optional features, durability, and reliability. Market dimensions refer to the characteristics of the target market—size, diversity, buying patterns, and geographic regions. The model has been criticized for its overlapping cat- egories. Most textbooks on strategy suggest that there are really only three competitive positions: cost, differentiation, and focus.

Value proposition A statement of the fundamental benefits of the products or services being offered in the marketplace

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NEL 19CHAPTER 1 Strategic Management

6. IMPLEMENT THE STRATEGY Strategy implementation is the process of establishing the programs, budgets, and procedures for facilitating the achievement of the strategic goals. If the goal is growth, what are the tech- niques for achieving this goal? Should a company expand its distribution channels to other regions? Should it attempt to change its culture? Strategy implementation is the process by which the strategy is put into action. This process is sometimes called operational plan- ning. It consists of programs, budgets, and procedures, such as those for HR. The program outlines the steps or activities necessary to accomplish the goal. If the goal is innovation, how can HR recruit, select, train, and create a supportive culture to accomplish it? The role of the HR function in enabling the execution of strategy is discussed in Chapter 2. The budget lists the detailed costs of each program, and defines how the organization is going to allocate its financial resources. Most organizations establish a hurdle rate, the percentage of return on investment necessary before a program is implemented. As you will see in Chapter 14 on evaluation, most HR managers are very skilled at preparing a budget for the implementation of a new program, but unable to discuss, in dollars, the rate of return for the program. Procedures list the steps required to get the job done. Most HR profes- sionals use procedures—for example, the procedure to recruit a university student—based on experience. But other functional areas would have these procedures established as standard operating practice; these would be applied uniformly across the company, in every site.

7. EVALUATE THE PERFORMANCE Developing a strategy is easy; making it happen is not. The ability to execute strategy is becoming a more important criterion for assessing not only managers but also the whole organization. The successful implementation of a strategy is judged by the ability

Strategy implementation The process by which a strategy is put into action Program The steps or activities necessary to accom- plish a goal Procedures The steps required to get a job done

There are many benefits to formulating and evaluating organizational strategy.

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Strategic Human Resources Planning NEL20

to meet financial targets such as profits, and the ability to meet benchmarked ratios of efficiency and effectiveness such as R&D expenses to sales, or sales to assets. As you will see in Chapter 14, companies are using the balanced scorecard approach to evaluate other important indicators of success, such as customer satisfaction or employee engagement. These measures are becoming increasingly valuable for their ability to predict financial and operational performance.

BENEFITS OF STRATEGY FORMULATION Working through the strategic planning process has these benefits:

• Clarity: There is focused and guided decision making about resource allocations.

• Coordination: Everyone is working toward the same goals. • Efficiency: Daily decision making is guided toward the question “Does it fit

with our strategy?” • Incentives: Employees understand the behaviours and performance that will be

rewarded. • Adjustment to change: If a major change is under consideration, understanding

the current strategy is essential. • Career development: Helps potential employees decide if they want to work for

the company, if there is a skills fit, and what training and development they will need to undergo.

Organizations that do not see the benefits of strategic planning have succumbed to these errors:

• Relegating the process to official planners, and not involving executives and managers (and even employees), resulting in no buy-in.

• Failing to use the plan as the guide to making decisions and evaluating performance.

• Failing to align incentives and other HR policies to the achievement of the strategy.

An understanding of the strategic planning process is the essential first step to creating an HR strategy that makes sense for the organization. Strategic HR planning complements the traditional approach to HR planning (forecasting supply and demand) but adds more strategic choices. Thus, at the most senior levels of the corporation, HR professionals move from an administrative role to the role of strategic partner. They understand strategies and business needs and create the kind of HR competencies that build competitive advantage.

The strategic planning model has dictated the structure of this text. We emphasize aligning HR strategy with business strategy (Chapter 2); monitoring and analyzing external factors (Chapter 3); assessing the strengths and weaknesses of organizations’ human resources (Chapters 4–8); the ways to implement an organizational change (Chapter 9),

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21CHAPTER 1 Strategic Management NEL

Information Technology for HRM

(8)

Note: Chapter numbers in parentheses

Forecasting (4)

Demand (5)

Supply (6)

Restructuring (10)

Organizational Change

(9)

International HRM (11)

Mergers and Acquisitions

(12)

Outsourcing (13)

Organizational Strategy

(1)

HRM Strategy (2)

Program Evaluation

(14)

The Environment (3)

Strategic Options

Succession Management

(7)

FIGURE 1.3

AN OVERVIEW OF THE ORGANIZATION OF THE TEXTBOOK

// SUMMARY It is important that HR professionals appreciate the role of strategic planning in their organizations and understand the language and terminology of strategic planning. A strategy is a planned process whereby organizations can map out a set of objectives and methods of meeting those objectives. A strategy may be intended—formulated at the beginning of the process—or realized—what actually happens. The strategy may also be emergent; that is, it is changing as necessary to deal with environmental changes. Corporate or company-wide strategies are concerned with the long-term view of the organization. Business strategies focus on one line of business, building a strong com- petitive position. One useful framework is a seven-step approach (see Figure 1.2). By

which will help with the following chapters that deal with determining the HR impli- cations of corporate strategies such as restructuring (Chapter 10), going international (Chapter 11), mergers and acquisitions (Chapter 12), outsourcing (Chapter 13), and assessing the effectiveness of these efforts (Chapter 14). Figure 1.3 graphically summarizes the organization of this book.

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22 NELStrategic Human Resources Planning

understanding strategy language and models, the HR professional can work with other executives to implement HR practices that enable strategy.

KEY TERMS acquisition p. 8 bankruptcy p. 7 business strategy p. 10 capabilities p. 16 competitive advantage p. 15 core competencies p. 17 corporate strategy p. 6 divestiture p. 7 dynamic capabilities p. 17 emergent strategy p. 4 intended strategy p. 4 liquidation p. 7 merger p. 8 mission statement p. 11 procedures p. 19 program p. 19 realized strategy p. 4 strategy p. 3 strategy implementation p. 19 turnaround strategy p. 6 value proposition p. 18 values p. 12 vision statement p. 12

DISCUSSION QUESTIONS 1. Identify companies currently operating under these corporate strategies:

restructuring—turnaround, divestiture, liquidation, and bankruptcy; and growth— incremental, international, and mergers and acquisitions.

2. Review these three mission statements and assess whether they meet the “person on a bus” test. • To provide book lovers and those they care about with the most inspiring retail

and online environments in the world for books and life-enriching products and services.

• X is dedicated to building a world-class national resource enabling Canadians to know their country and themselves through their published heritage, and to providing an effective gateway to national and international sources of information.

• X is an independent campaigning organization that uses nonviolent, creative confrontation to expose global environmental problems and to force the solu- tions essential to a green and peaceful future.

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23CHAPTER 1 Strategic Management NEL

3. The focus in this chapter (and in strategy literature) is on private companies. Check the websites of government departments and identify at least 10 strategies (often called plans or mission statements). Can you identify any that correspond to some of the models of business strategies? Can you create a model or typology for public- sector organizations? To start, consult J. Tomkins, “Strategic Human Resources Management in Government: Unresolved Issues,” Public Personnel Management, Vol. 31, No. 1 (2002): 95–110.

EXERCISES 1. Identify two companies working in the same sector (hotels, restaurants, and post-

secondary institutions are good choices), one using a low-cost provider strategy and one using a differentiation strategy.

2. Research these two companies’ mission, vision, and value statements. 3. Discuss their differences in resources, capabilities, and core competencies. 4. Compare and contrast the practices of the two companies.

CASE STUDY LOBLAW COMPANIES LTD.

The Canadian food retailing sector had been growing at less than 1 percent a year, and in 2012 it was a $86 billion business. There are a number of competitors in this sector, including Sobeys, Metro, Costco Canada, Canada Safeway, and Walmart Canada. Loblaw Companies is Canada’s largest food distributor with sales of more than $32 billion, 1000 stores, and 136 000 employees. The organizational objectives were to control costs through efficiencies and differentiate its products (through private-label brands such as President’s Choice, No Name, Organics PC, and Joe Fresh) and its stores (through 22 different brand banners such as Loblaw, Fortinos, No Frills, Provigo, Zehrs, Wholesale Club, and Atlantic Superstore). In 2009, it acquired T&T, the largest Asian foods chain, to capitalize on the growing ethnic food market. In 2013, it acquired Shoppers Drug Mart. In 2016, Amazon purchased Whole Foods and threatens to disrupt the grocery business. To compete, Loblaws initiated a “click and collect” on fresh grocery orders. At the same time, governments are increasing the minimum wage, which will increase its labour costs by $190 million annually.

The largest threat to Loblaw’s strategy is Walmart, the world’s largest retailer. The latter has a growth strategy, opening hundreds of stores every year. Walmart arrived in Canada in 1994, by acquiring 122 Woolco stores. Walmart not only used size and scale to compete (as did other retailers) but also mastered the use of technology to drive costs down. For example, its centralized information system tracked the operations of 5000 stores worldwide, and linked them with about 30 000 suppliers, all in real time.

Sources: Shaw, H. “Loblaw taking stock of very compelling threat of Amazon, CEO,” businessfinancial- post.com, retrieved September 19, 2017; www.loblaws.com; “Loblaw Companies Limited: Company Profile,” www.datamonitor.com; Z. Olyjnk, “Look Who’s Eating Loblaw’s Lunch,” Canadian Business, Vol. 80, No. 5 (February 26, 2007): 44; and http://www.canadiangrocer.com/top-stories/state-of-the- canadian-grocery-industry-31101, retrieved November 28, 2014.

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24 NELStrategic Human Resources Planning

QUESTION

1. Conduct a SWOT analysis for Loblaw. As a group, assess the company against the strengths, weaknesses, threats, and opportunities contained in the SWOT matrix below.

SWOT ANALYSIS Potential Resource Strengths and Competitive Capabilities

• A powerful strategy • Superior intellectual capital relative to key rivals

• Core competencies in ____________________

• Cost advantages over rivals

• A distinctive competence in ___________________

• Strong advertising and promotion

• A product that is strongly differentiated from those of rivals

• Product innovation capabilities

• Competencies and capabilities that are well matched to industry key success factors

• Proven capabilities in improving production processes

• A strong financial condition; ample financial resources to grow the business

• Good supply-chain management capabilities

• Strong brand-name image/company reputation

• Good customer service capabilities

• An attractive customer base • Better product quality relative to rivals

• Economy of scale and/or learning and experience curve advantages over rivals

• Wide geographic coverage and/or strong global distribution capacity

• Proprietary technology/superior techno- logical skills/important patents

• Alliances/joint ventures with other firms that provide access to valuable technology, competencies, and/or attractive geographic markets

POTENTIAL MARKET OPPORTUNITIES

• Openings to win market share from rivals • Expanding the company’s product line to meet a broader range of cus- tomer needs

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25CHAPTER 1 Strategic Management NEL

• Sharply rising buyer demand for the industry’s product

• Utilizing existing company skills or technological know-how to enter new product lines or new businesses

• Serving additional customer groups or market segments

• Online sales

• Expanding into new geographic markets • Integrating forward or backward

• Falling trade barriers in attractive foreign markets

• Entering into alliances or joint ventures that can expand the firm’s market coverage or boost its competitive capacity

• Acquiring rival firms or companies with attractive technological expertise or capabilities

• Openings to exploit emerging new technologies

POTENTIAL RESOURCE WEAKNESSES AND COMPETITIVE DEFICIENCIES

• No clear strategic direction • Behind on product quality, R&D, and/or technological know-how

• Resources that are not well matched to industry key success factors

• In the wrong strategic group

• No well-developed or proven core competencies

• Losing market share because

• A weak balance sheet; too much debt • Lack of management depth

• Higher overall unit costs relative to key competitors

• Inferior intellectual capital relative to leading rivals

• Weak or unproven product innovation capabilities

• Subpar profitability because ______________

• A product/service with ho-hum attributes or features inferior to those of rivals

• Plagued with internal operating problems or obsolete facilities

• Too narrow a product line relative to rivals • Behind rivals in e-commerce capabilities

• Weak brand image or reputation • Short on financial resources to grow the business and pursue promising initiatives

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26 NELStrategic Human Resources Planning

ANSWERS TO HR PLANNING TODAY 1.3 1. Canada Post 2. Starbucks 3. Canadian Red Cross 4. Patagonia 5. IKEA 6. Nike

// REFERENCES 1. HBC. “Our History.” http://www.hbcheritage.ca/hbcheritage/history/over-

view.asp. Retrieved October 17, 2014.

2. Collis, D.J., and M.F. Rukstad. 2008. “Can You Say What Your Strategy Is?” Harvard Business Review, Vol. 86: 82–90.

3. Anthony, W.P., P.L. Perrewe, and K.M. Kacmar. 1993. Strategic Human Resources Management. Fort Worth, TX: Harcourt Brace Jovanovich.

4. Quinn, J.B. 1980. Strategies for Change: Logical Incrementalism. Homewood, IL: Richard D. Irwin.

5. Collins, J. 2001. Good to Great. New York: Harper Business.

• Weaker dealer network than key rivals and/or lack of adequate global distribution capability

• Too much underutilized plant capacity

• Increasing intensity of competition among industry rivals may squeeze profit margins

• Likely entry to potent new competitors

• Slowdowns in market growth • Loss of sales to substitute products

• Growing bargaining power of customers or supplies

• Restrictive trade policies on the part of foreign governments

• A shift in buyer needs and tastes away from the industry’s product

• Costly new regulatory requirements

• Vulnerability to industry driving forces • Increased costs relating to utilities

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27CHAPTER 1 Strategic Management NEL

6. Lengnick-Hall, C., and M. Lengnick-Hall. 1990. Interactive Human Resource Management and Strategic Planning. New York: Quorum Books.

7. Duane, M.J. 1996. Customized Human Resource Planning. Westport, CT: Quorum Books.

8. Thompson, A.A., M.A. Peteraf, J.E. Gamble, and A.J. Strickland. 2010. Crafting and Executing Strategy: The Quest for Competitive Advantage (18th ed.). New York: McGraw-Hill Companies.

9. http://www.theglobeandmail.com/globe-investor/target-heads-north-in- zellers-deal/article1868308. Retrieved March 28, 2011.

10. Thompson et al. 2010.

11. Ibid.

12. Woodcock, C.P., and P.W. Beamish. 2003. Concepts in Strategic Management (6th ed.). Toronto: McGraw-Hill Ryerson.

13. Certo, S.C., and J.P. Peter. 1993. Strategic Management: A Focus on Process (2nd ed.). Boston: Irwin.

14. Kaplan, R.S., and D.P. Norton. 2008. “Mastering the Management System.” Harvard Business Review, January: 64–77.

15. Certo and Peter. 1993.

16. http://www.alibabagroup.com/en/about/overview. Retrieved November 17, 2014.

17. Crossan, M.M., J.N. Fry, and J.P. Killing. 2002. Strategic Analysis and Action (5th ed.). Toronto: Prentice Hall.

18. Kaplan, R.S., and D.P. Norton. 2007. “Using the Balanced Scorecard as a Strategic Management System.” Harvard Business Review, July/August: 150–161.

19. Peteraf, M.A., and J.B. Barney. 2003. “Unraveling the Resource-based Tangle.” Managerial & Decision Economics, Vol. 24: 309–323.

20. Hitt, M.A., R.D. Ireland, R.E. Hoskisson, W.G. Rowe, and J.P. Sheppard. 2002. Strategic Management, Competitiveness and Globalization Concepts. Toronto: Nelson Thomson Learning.

21. Ulrich, D., and N. Smallwood. 2004. “Capitalizing on Capabilities.” Harvard Business Review, June: 119–127.

22. Barney, J.B. 1995. “Looking Inside for Competitive Advantage.” Academy of Management Executive, Vol. 9: 49–61; Collis, J., and C.A. Montgomery. 1995. “Competing on Resources: Strategy in the 1990s.” Harvard Business Review, Vol. 73, No. 4 (July/August): 118–128.

23. Collis, D.J., and C.A. Montgomery. 2008. “Competing on Resources.” Harvard Business Review, Vol. 86: 140–150.

24. Hoskisson, R.E., M.A. Hitt, and R.D. Ireland. 2004. Competing for Advantage. Mason, OH: Thompson South-Western.

25. Thompson et al. 2010.

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28 NELStrategic Human Resources Planning

26. Collins. 2001.

27. Teece, D.J., G. Pisan, and A. Shuen. 1997. “Dynamic Capabilities and Strategic Management.” Strategic Management Journal, Vol. 18: 509–533.

28. Kary, T., and L. Sandler. 2011. “Borders Files Bankruptcy, Is Closing Up to 275 Stores.” http://www.bloomberg.com/news/2011-02-16/borders- book-chain-files-for-bankruptcy-protection-with-1-29-billion-debt.html (February 16). Retrieved March 7, 2018.

29. Thompson et al. 2010.

30. Ibid.

31. Dess, G.G., and G.T. Lumpkin. 2003. Strategic Management: Creating Competitive Advantages. Boston: McGraw-Hill.

32. Porter, M.E. 1985. Competitive Advantage. New York: Free Press.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand the importance of strategic HR planning. • Identify the risks associated with not planning. • Discuss approaches to linking strategy and HR, including the barriers to

becoming a strategic partner. • List the characteristics of an effective HR strategy.

ALIGNING HR WITH STRATEGY

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Strategic Human Resources Planning NEL30

// STRATEGIC HRM Human resources management (HRM) can be viewed as an umbrella term that encom- passes the following:

• Overarching HR philosophies that specify the values that inform an organization’s policies and practices

• Formal HR policies that direct and partially constrain the development of specific practices, such as to increase workforce diversity

• Specific HR practices, such as recruitment, selection, and appraisal

Strategic HRM is the management of HR philosophies, policies, and practices to enable the achievement of the organizational strategy. Ideally, these philosophies, policies, and practices form a system that attracts, develops, motivates, and trains employees who ensure the survival and effective functioning of the organization and its members.1 As described in the opening vignette, some think the discipline of HRM should be split into two areas, much like accounting and finance or sales and marketing.2 One area would deal with transactional activities, such as payroll, which are routine but necessary, just like accounting. The second area would function like a decision science, concerned with the effective utilization of human capital, much like finance. In this model, strategic HRM would be concerned with decisions about HR practices, the composition and behaviours of employees, and the effectiveness of these decisions given various business strategies.3 These strategic activities are compre- hensive, are planned, and in their contribution to organizational success are considered high-long-term-value-added.4

While managers recognize implicitly that the marketing strategy must support the business strategy, there is not the same sense among managers that HR programs can be designed to support the organizational strategy. And yet human capital issues are at the top of the CEO agenda, with more than half of the top priorities (attraction, reten- tion, innovation) needing HR input.5 According to recent surveys, three-quarters of Canadian organizations believe that HR is more influential now than five years ago; the

Strategic HRM Interrelated philosophies, policies, and practices that facilitate the attain- ment of organizational strategy

Johnson and Johnson is a multinational manufacturer of consumer goods and pharmaceutical products. Its prod- ucts are sold in over 175 countries and it operates in 60 countries. The HR department is currently being reor- ganized. Administrative, transactional work is outsourced to locations such as Prague and Manila. The corporate centre focuses on talent management. For example, J & J does 25 000 job placements each year. One group, the data analytics group, with 15 people, researches what are the best predictors of employee success, which of course, is directly linked to organizational success. This

group of analysts identifies the best HR practices and implements them worldwide. These HR practices con- tribute to the success of the organization’s strategy. The structure of the HR departments reflects the emerging trend to separate (and possibly outsource) transactional work, and focus on strategic HR.

Source: https://en.wikipedia.org/wiki/Johnson_%26_Johnson; http://www.hrmonline.ca/hr-general-news/hr-transformation-

underway-at-johnson-and-johnson-225261.aspx. Retrieved September 20, 2017.

HR STRUCTURE AT JOHNSON AND JOHNSON

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NEL 31CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

reorganization of HR importance is especially higher among CEOs and senior managers (about three-quarters believe so) than other managers (about half).6

// THEORIES OF THE STRATEGIC MANAGEMENT OF HUMAN RESOURCES HR practitioners themselves do not seem to value theory. HR is seen as atheoretical and problem driven.7 But the field is young, and perspectives are indeed emerging that can be seen as providing the theoretical underpinnings.

HRM MAKING STRATEGIC CONTRIBUTIONS Human resources management, formerly called “personnel management,” started as an administrative function and has traditionally been associated with costs in organizations. Its contributions were often measured by the number of disputes resolved, applicants recruited, total hours spent on training etc. It is no wonder that many organizations attempted to minimize the size of the HR department by outsourcing administrative tasks to external vendors.

During the 1980s, strategic HR researchers and practitioners started to wonder whether HRM could make strategic contributions to organizations. Certain “high- performance” HR practices, such as selective hiring, extensive training, and competi- tive pay, came to be considered “best practices,” because they were often found in the most successful organizations.8 Cumulated research showed consistent evidence that the implementation of high-performance HR systems significantly predicted various organizational performance indicators, ranging from reduced employee turnover to improved quality and organizational performance.9

This perspective stimulated a broad implementation of high-performance HR sys- tems in many businesses, as managers began to believe that investment in HR would eventually lead to higher financial performance. The term human resources was adopted, reflecting the recognition of personnel as valuable “resources” that create competitive advantage, an idea that can be traced back to the resource-based view.

RESOURCE-BASED VIEW

The resource-based view was introduced in Chapter 1, in which the culture of Southwest Airlines was described as a resource that provided a sustained competitive advantage, because its culture is valuable, rare, and very difficult to imitate or substitute. The less a resource can be imitated, the more durable the source of competitive advantage. In addition to culture, a firm’s human resources can create sustained competitive advan- tage if they meet all four criteria suggested by the resource-based view. First, employees who have superior performance because of their skills, commitment, or flexibility are valuable—they help the company beat out competitors by offering better service/unique products or reducing costs. The employee loyalty of Marks & Spencer, for example, helped reduce its labour costs to 8.7 percent, against an industry average of 10 to 20 percent. This dramatically added value to the company.10

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Strategic Human Resources Planning NEL32

Second, human resources can be difficult for competitors to imitate. If IBM introduces a new software package in January, Microsoft can probably imitate or duplicate this package by February of the same year. However, if IBM technical support people are trained and motivated to provide “knock-your-socks-off service,” Microsoft will have a difficult time imitating this workforce within a month. Indeed, Porter estimates that it takes approximately seven years to duplicate a competitive edge in human resources. The competition can’t just “buy” these employees, because their effectiveness is embedded in the HR systems of training, compensation, performance appraisal, and culture that allow them to work productively.11

Third, the best human resources are rare. “Talent war” describes the fierce competi- tion among firms, especially in the high-technology industry, for the best talent. Almost 80 percent of Canadian organizations indicated that they had difficulty recruiting quality candidates with skills that were important to the organization or in high demand.12 More reputable employers known for their advantage in attracting, developing, and keeping good talent are more likely to gain access to the best talent on the market.

Finally, the value of human resources can be hard to substitute. As discussed in Chapter 1, dynamic capabilities are critical for today’s businesses to continuously lead the competition. Dynamic capabilities allow businesses to be the first to discover new opportunities, to act faster than others to seize opportunities, and to quickly create the internal processes needed to realize these opportunities.13 Other resources such as technology and physical resources do not have free will, and thus cannot substitute for decisions and changes made by human resources.14 Take, for example, the compe- tition between Apple and Nokia. Nokia was once known for its superior technology in producing the most reliable hardware. However, technology and resources do not regenerate by themselves. Yesterday’s cutting-edge technology can become inadequate today. Apple bested Nokia in accurately sensing the potential market for smartphones, swiftly entering the business, and successfully regenerating its technology to become competitive in the market, largely due to the dynamic capabilities created by its human resources. The HR department’s role, then, is to develop a system that will facilitate and stimulate innovative thinking processes.

Therefore, a firm’s human resources are more valuable for sustained competitive advantage than technological and physical resources, particularly in today’s competi- tive and fast-changing environment, because human resources are less visible, more complex, and can initiate change.15 For these reasons, human resources are increasingly perceived as strategic resources. Given the unlimited potential of HR, how to exploit it is explained by the contingency perspective.

THE CONTINGENCY PERSPECTIVE In Chapter 1 we learned that business strategies ranged from low cost to high differ- entiation. Although high-performance HR practices in general contribute to high per- formance, they may be more cost effective for businesses that pursue a differentiation strategy than for those implementing a low-cost strategy. This is called the contingency perspective of HRM. It is not difficult to imagine that employees working at Ritz-Carlton would be very different from those working at Comfort Inn: they vary in their human capital (e.g., communication skills), as well as in the behaviours (e.g., customer orien- tation) that they display to customers. Such employee differences are largely shaped by the HR practices in place, and can be explained by the human capital and behav- ioural theories.

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NEL 33CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

HUMAN CAPITAL THEORY

Classical economists describe three types of resources or inputs used in the production of goods and services: land, capital, and labour. Labour, or human capital, refers to the collective sum of the attributes, experience, knowledge, and commitment that employees choose to invest in their work. This intangible asset comprises the knowledge, educa- tion, vocational qualifications, professional certifications, work-related experience, and competence of an organization’s employees.16 As researchers have noted, “In the new economic paradigm, as the demands for continuous change make innovation, adapt- ability, speed and efficiency essential features of the business landscape, the strategic importance of intellectual capital and intangible assets [has] increased substantially. While these assets are largely invisible . . . the sources are not. They are found in the human capital of the firm’s employees.”17 From the perspective of human capital, employees are viewed as a capital resource that requires investment.18

Employees are of value to the organization to the extent that they work toward accomplishing organizational objectives. Costs incurred in training, motivating, com- pensating, and monitoring employees can be viewed as investments in human capital, just as maintenance of equipment is an investment in the capital of the firm.19 Thus, human capital’s value added can be estimated by

2 !Total revenue (operating expenses total compensation costs) Total compensation costs

Using this formula, it was estimated that the median human capital return on invest- ment for Canadian organizations was $2.26, meaning that each dollar organizations

Human capital The sum of employees’ knowledge, skills, experience, and com- mitment invested in the organization

These scientists represent the human capital of their organization.

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Strategic Human Resources Planning NEL34

invested on human capital generated $2.26 in return. Human capital return on invest- ment also varied by industry, with finance, insurance, and real estate having the highest median return ($6.89), followed by manufacturing and construction ($2.19), and whole- sale and retail trade ($2.02).20 It is reasonable to expect that human capital return on investment would also vary by strategy, with differentiated organizations generating a higher return than low-cost organizations.

The advantages of an organization with effective HR practices may come not only from having better resources but also from making better use of these resources by achieving higher productivity per worker and matching the capabilities of employees with the strategy.21 Organizations that compete on service excellence, for example, would invest in service-related human capital. Banks that invested in HR systems for service quality, such as selecting, training, and rewarding employees’ service-related skills, had superior service-related human capital and subsequently higher customer evaluation of service quality.22 To simplify, having a stock of human capital is similar to having a team of talented players. Knowing how to leverage their talents is like having skills in managing and coaching this team. So, too, without the right HR systems, the employees are less effective.

BEHAVIOURAL THEORY The behavioural perspective suggests that different strategies require not only different human capital, but also different behaviours of employees.

An effective HR system first accurately identifies the behaviours needed to implement a strategy. For example, what kinds of employee behaviours are needed for Google to produce innovative ideas? This question may not sound difficult for HR managers; providing expert opinion on human behaviour might be where the HR profession adds the most unique value. Most HR managers have a clear under- standing of whether the company needs risk taking or rule following, competition or teamwork. HR’s role is to tactfully challenge and refocus baseless ideas of human behaviour.23 How to design the HR system to ensure that employees have the skills and opportunities to exhibit desired behaviours and are motivated to do so is more complex and requires deep thinking and systematic analysis.24 In general, researchers consider performance appraisal, pay for performance, incentive plans, advancement opportunities, and benefits to enhance employee motivation to behave. Concomi- tantly, practices such as employee involvement, participation in decision making, voice and grievance, performance feedback, teamwork, and job enrichment provide opportunities for employees to behave. Both practice bundles have shown significant impact on organizational outcomes.25

Behavioural perspective suggests that these HR practices should be further linked to a particular behavioural objective. For example, what kinds of HR practices will produce innovative behaviours? Google encouraged innovative behaviours by selecting people with high creativity, providing them with time and freedom to innovate, and motivating them to innovate through various incentive programs. But this is only one of many ways of encouraging creativity; each method may be specific to each organiza- tion’s culture and traditions. We will discuss the alignment of HR system with business strategy in more detail later in the chapter.

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NEL 35CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

The behavioural perspective is particularly important as the HR department is asked to define and develop the behaviours necessary to achieve organizational capabilities of innovation, speed, and accountability.26

STRATEGIC HR PLANNING Despite the potential of HRM to make strategic contributions, HRM issues are often cited as a threat to an organization’s ability to execute strategy. The free will, complex behaviours, and human capital make effectively planning and managing human resources extremely difficult.

A more traditional perspective of the HR planning concept implied that the orga- nization was concerned only with possible problems of labour surpluses and shortages. The goal was to determine the knowledge, skills, and abilities (KSAs) required within broad organizational outcomes such as growth or decline. Much emphasis was put on the statistical techniques for analyzing resource supply and demand forecasting while ignoring managerial realities and support for the process.27 This is now regarded as a narrow, linear approach to HR planning.

There is some concern that the narrow approach of HR planning does not consider the different HR practices required by fundamentally different strategies. For example, a company that decides to grow through the introduction of innovative products needs employees with different kinds of skills from a company that will grow through great customer service. Under traditional HR planning models, both strategies would require the acquisition and absorption of large numbers of employees, but the HR prescriptions for selection, training, and performance management, for example, would differ radically.

In reality, HR departments may fall somewhere on the continuum of options presented in Figure 2.1. Executives can expect that their HR departments will fall into one of the options listed in the continuum.

In this book, we are suggesting both an approach of forecasting supply and demand of human resources and an approach that calls for tailoring HR policies and practices to the organizational needs of the future. The proliferation of bankruptcies, mergers,

AD HOC HEAD COUNT PLANNING

WORKFORCE FORECASTING ANALYTICS

STRATEGIC WORKFORCE PLANNING

HUMAN CAPITAL PLANNING

No workforce planning/hire as needed

Head count analysis and basic labour costing

Historical or lag- ging performance indicators/ descriptive workforce analytics

Workforce segmentation/ workforce plan- ning to support projected busi- ness needs

Enterprise- level workforce planning/ workforce risk management and mitigation planning

Source: Courtesy of The Conference Board of Canada, 2017, Workforce Planning Practices in Canada: Human Resources Trends and Metrics, Fourth Edition, p. 17.

FIGURE 2.1

A WORKFORCE PLANNING CONTINUUM

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Strategic Human Resources Planning NEL36

and restructuring has affected our view of employees profoundly and highlighted the need for the input of HR professionals in formulating policy.

THE IMPORTANCE OF STRATEGIC HR PLANNING For the last eight years of surveys, The Conference Board of Canada reports that execu- tives have identified HR planning as the most important long-term HR priority for Canadian organizations.28 Executives are demanding that the HR department move from articulating perceived value (“training builds employee skills”) to demonstrating real value (the training results in fewer errors or more sales). As a member of the cor- porate team, the focus of HR must be on scoring points, not just coaching, training, or counting the number of players. The value of HR will be seen in its ability to deliver the behaviours needed to enable the organization’s strategy. There are at least two rea- sons strategic HR planning is so important: (1) employees help an organization achieve success because they are strategic resources, and (2) the planning process itself results in improved goal attainment.

The value of employees as a resource must be placed within a strategic framework. In other words, a strategy itself can become obsolete, making current employee skills obsolete. Suppose, for example, that the current workforce may be valuable because of manual skills, but the market for the company’s manufactured products is declining. Environmental analyses suggest that the corporation enter the high-tech field, with its demand for flexible, knowledgeable workers. By changing the strategy, the “value” of the current workforce is diminished. This requires HR planners to be forward looking; when there is a vacancy, HR managers might not look for replacements for current skills, but rather consider what skills will enable the organization to implement its strategy a few years from now. A corollary is that employees can expect to face different HRM practices throughout their lifetimes, and even within a single organization. Employees might be asked to exhibit different behaviours, depending on strategic goals, and these behaviours will be motivated by different HRM practices.29 HR planning ensures that human assets are managed and matched to the organizational strategy. Readers are invited to assess the HR planning efforts led by Billy Beane at the Oakland Athletics in the end-of-chapter exercises.

IMPROVED GOAL ATTAINMENT Strategic HRM can improve an organization’s performance. The goals of these HRM strategies are to shape employee behaviour so that it is consistent with the direction the organization identifies in its strategic plans. Organizations with clear strategies provide direction and meaning to employees and mitigate the need for control by substituting a consistency of purpose—in other words, a mission. This articulated vision for the future may result in a more effective organization through increased motivation and performance, lowered absenteeism and turnover, and heightened stability, satisfaction, and involvement.30

Only one third of Canadian executives state that their strategies are supported by a workforce plan.31 But what makes HR planning so difficult? Again, the survey from The Conference Board of Canada provides some insights (see HR Planning Notebook 2.1).

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NEL 37CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

To summarize, strategy formulation is important to the attainment of organiza- tional goals in order to align all HR functional strategies with overall strategy and to focus employees on important missions and goals of the organization. Research and observations have demonstrated that developing HR practices that support the strategy leads to improved strategy implementation. An apt cliché is “an organization that fails to plan, plans to fail.”

// LINKING HR PROCESSES TO STRATEGY Strategic HRM has to facilitate the formulation and implementation of corporate and business-level strategies. Senior managers must focus on issues such as the HR implica- tions of adopting a strategy. What are the internal and external constraints and oppor- tunities? Exactly what policies, practices, and philosophies contribute to the successful implementation of the strategy?

The basic premise is that every HR policy and practice must directly support the organization’s strategy and objectives.32 This does not happen as frequently as it should. Aligning HR strategy with business strategy can be done in one of these ways:

1. Start with organizational strategy and then create HR strategy.

2. Start with HR competencies and then craft corporate strategies based on these competencies.

3. Do a combination of both in a form of reciprocal relationship.

Let us examine each approach.

HR PLANNING NOTEBOOK 2.1

PRACTICAL AND PERCEPTION BARRIERS TO WORKFORCE PLANNING

PRACTICAL BARRIERS PERCEPTION AND ATTITUDE BARRIERS

• Leaders lack planning and business acumen • Seen as important, but not urgent • Multiple planning horizons • Resistance to change: “We always got by in the past” • Organizational silos • Lack of a holistic approach • Moving targets—business goals are not clear • It is hard to measure success • Union restrictions, and barriers to internal employee mobility • Seen as too daunting to change • No budget, or not enough budget • Considered to lack credibility • No data available • Not enough time, too busy, competing priorities, “daily

bombs,” and “fighting fires”

Source: Courtesy of The Conference Board of Canada, 2017, Workforce Planning Practices in Canada: Human Resources Trends and Metrics, 4th ed., p. 13.

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Strategic Human Resources Planning NEL38

CORPORATE STRATEGY LEADS TO HR STRATEGY A traditional perspective of HR planning views HRM programs as flowing from corporate strategy. In other words, personnel needs are based on corporate plans. If a firm decides to compete on the basis of offering low-cost products, HR policies and practices must align and be based on low labour costs. McDonald’s is a good example. To illustrate the alignment of HR programs with business strategy, HR Planning Today 2.1 focuses on two strategies under Porter’s model: the low-cost-provider strategy and the differentiation strategy. Although Porter recognized the importance of HRM, and even concedes that, in some firms, HRM holds the key to competitive advantage, he did not delineate any specific practices that can be aligned with business strategy. HR Planning Today 2.1 provides one of the few “recipes” for using HR strategies to support a business strategy.

HR PLANNING TODAY 2.1

HR ALIGNMENT WITH TWO STRATEGIES

Strategy 1: Low-Cost-Provider Strategy

A firm competing on cost leadership attempts to be the low-cost provider of a product or service within a mar- ketplace. The product or service must be perceived by the consumer to be comparable to that offered by the competition and to have a price advantage. McDonald’s uses this approach, as does Timex.

Buyers are price sensitive, and businesses appeal to this price consciousness by providing products or services at prices lower than those of competitors. Survival is the ultimate goal, but organizations price low to gain market share (by underpricing competitors) or to earn a higher profit margin by selling at the going market rate. This strategy requires the company to balance the delivery of a product that still appeals to customers with not spending too much on gaining market share. McDonald’s could deliver a cheaper hamburger, but would it have any taste? McDonald’s could underprice its competitors, but it may risk its survival by going too low. The key is to manage costs every year.

The adoption of a low-cost-provider strategy by a firm has immediate implications for HR strategy. Costs are an important element of this strategy, so labour costs are carefully controlled. Efficiency and controlling costs are paramount. The implications of a low-cost-provider strategy for six key components of HR are discussed

below, but first we start with the job description of a typical employee working in a company that competes as a low- cost provider.

The Employee

To keep wages low, jobs have to be of limited scope so that the company can hire people with minimal skills at low wages. The job requires highly repetitive and predictable behaviours. There is little need for cooperative or inter- dependent behaviours among employees. The company directs its efforts at doing the same or more with less and capitalizing on economies of scale. Doing more with fewer employees is the goal of most organizations with a low-cost-provider strategy.

Risk taking on the part of the employee is not needed, but comfort with repetitive, unskilled work is necessary. Customers like those frequenting McDonald’s are “trained” not to make idiosyncratic requests (such as a “medium- rare hamburger” or “hot mustard”), and so no unique response system is required. Employees are not expected to contribute ideas.

Another way to cut costs is to eliminate as many of the support or managerial layers as possible. The impact of cutting costs in this way is that employees may have to do more with less, make more decisions, and so on, which would require a more skilled employee. Alternatively, the

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NEL 39CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

jobs could be so tightly designed that little supervision is required, thus saving costs. Substituting technology for labour is another way to save costs.

We now look at six HR functions that will facilitate the personnel work at a low-cost-provider organization.

HR Planning

At the entry level, succession planning is minimal, ensuring only the feeder line to the next level. Outside labour mar- kets are monitored to ensure that entry-level people are in adequate supply. The availability and use of fringe workers—those who are retired, temporarily unemployed, students, and so on—is part of the planning strategy, particularly if the employment market is offering better opportunities to the normal supply of low-skilled workers.

At the executive level, succession management assumes the same importance as in other organizations.

Selection

Recruitment is primarily at the entry, or lowest, level and is from the surrounding external labour market. Recruitment is by word of mouth, and application forms are available on-site, thus saving the costs of recruiting in newspapers. Most other positions are staffed internally through promo- tions. Thus, career paths are narrow.

Compensation

A low-cost-provider strategy includes lower wages and fringe benefits. Beyond the legal minimum pay require- ments, firms with this strategy carefully monitor what their competitors are paying in the local labour market. These firms’ strategy tends to be a lag strategy, where they attempt to pay wages slightly below industry norms.

One way of achieving these lower costs is to out- source production to sites with lower labour costs. In the United States, this means moving production from high- wage states, such as New York, to low-wage states, such as New Mexico. In Canada, wages are very similar across provinces, so firms analyze wage rates in countries such as India, which pay employees substantially less for similar productivity. Outsourcing has also meant moving the work from highly unionized plants, where workers make $20 or more an hour, to nonunionized smaller sites, where workers are paid slightly more than the minimum wage.

Cost reduction in wages can also be achieved through the use of part-time workers, who receive no fringe ben- efits. Canadian organizations pay around 30 percent in fringe benefits, so the savings gained by using part-time workers is substantial among large employers. Food franchises employ part-time workers almost exclusively to reduce labour costs.

Pay for performance, such as incentive compen- sation that is linked to productivity, rewards individual effort. Group rewards are based on explicit, results- oriented criteria and the meeting of short-term perfor- mance goals.

Programs designed to reduce labour costs, such as outsourcing or using part-time workers, can easily be imitated by competitors, and so may produce no long- term competitive advantage. However, an innovative compensation scheme that cannot be duplicated by rivals may provide a competitive advantage. For example, in an arrangement between the Great Atlantic and Pacific Tea Company (A&P) and the United Food and Commercial Workers (UFCW), workers took a 25 percent pay cut in exchange for cash bonuses. If the store’s employees could keep labour costs at 10 percent of sales by working more efficiently or generating more store traffic, they would receive a cash bonus of 1 percent of store sales. This arrangement resulted in an 81 percent increase in oper- ating profits. However, unions were opposed to the spread of this practice, and so A&P’s rivals in the low-margin food business were unable to reduce their labour costs in the same way. Any incentives for performance would reward cost savings, or improvements in efficiency, as this example shows.

Training

Training is minimal, as few skills are required. Any training is based on increasing efficiency in the current job, or specialization for the current position. Such training is fast and inexpensive. McDonald’s can train a new ham- burger flipper or cashier within a few hours. There is little to no investment in the long-term development of the employee, nor in the acquisition of skills for jobs other than the current one.

The training staff is lean, with the organization relying on outside suppliers for its limited training needs. However, most training takes place on the job in the form of direct instruction from or coaching by the supervisor. The jobs

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Strategic Human Resources Planning NEL40

are so narrow in scope, so repetitive in nature, that little need for training exists.

Performance Evaluation

Short-term results, with explicit and standardized criteria, are used to evaluate an employee’s performance. The feedback is immediate and specific. Individuals are held accountable only for their own behaviour or results, not for that of the team or the company. Only the supervisor pro- vides input for the performance evaluation. Forms are kept to a minimum, and rating is done against check marks. Feedback, if based on a performance review, tends to be one-way, with little opportunity for the employee to debate the results or receive developmental feedback. Results are used for consideration for promotion.

Labour Relations

Low-cost providers try to prevent the formation of a union because they believe that unions drive up wages. Unions find low-cost providers, such as McDonald’s, difficult to unionize. (Employees working part-time hours have little interest in unionization because they believe that this is a part-time job that they will leave in the near future, and they are unlikely to benefit from belonging to a union, to which they have to pay fees. It is also difficult to organize those working night shifts.) Furthermore, employees quit often, and many low- cost providers absorb turnover rates of 300 percent annually as a cost of doing business. High turnover has the primary advantage of keeping compensation levels low.

Now that we have an idea of how HR programs align with a low-cost provider strategy, let us examine what these programs would be like under a differentiation strategy.

Strategy 2: The Differentiation Strategy

In most markets, buyer preferences are too diverse to be satisfied by one undifferentiated product. Firms providing features that appeal to a particular market segment are said to compete on a differentiation strategy. A firm com- peting on the basis of a differentiation strategy will offer something unique and valuable to its customers. BMW, Polo Ralph Lauren, Rolex, and Hewlett-Packard’s scientific instruments divisions are firms that compete successfully by charging a price premium for uniqueness. The primary focus is on the new and different. Observation, experience, and market research will establish what buyers consider

important, what has value, and what buyers will pay for these features. Then the firm can offer a product or service that commands a premium price, increase unit sales within this niche, and gain buyer loyalty among those who value these features. The extra price outweighs the extra costs of providing these features.

A firm can differentiate itself from its competitors in many ways:

• Having quality products • Offering superior customer service • Having a more convenient location • Using proprietary technology • Offering valuable features • Demonstrating unique styling • Having a brand-name reputation

These different features can be anything. Common examples show some firms competing on service (Four Seasons Hotels), engineering design (BMW), image (Polo Ralph Lauren), reliability (Bell), a full range of products or services (Procter & Gamble), technological leadership (RIM), and quality (Honda).

Most of the time, these competitive advantages are combined, such as by linking quality products with propri- etary technology and superior customer service, thus pro- viding the buyer with more value for money. The key in this strategy is to provide the differentiation that is perceived to be of value to customers while keeping costs down. For example, a slice of lemon in a glass of ice water delivered to the table is an obvious way to differentiate the restaurant, but at low cost. After-dinner mints are less expensive than valet parking, but may be equally appreciated by diners.

A differentiation strategy calls for innovation and creativity among employees. HRM is affected in funda- mentally different ways in organizations that want to use employees’ brains rather than their limited (mainly manual) skills in the low-cost-provider strategy.

The starting point for aligning HR programming with a differentiation strategy is the employee.

The Employee

Organizations competing on a differentiation strategy require from their employees creative behaviour, a long- term focus, interdependent activity, and some risk taking,

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NEL 41CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

as well as an ability to work in an ambiguous and unpre- dictable environment. Their employees’ skills need to be broad, and employees must be highly involved with the firm. Organizations encourage employees to make suggestions, through both informal and formal suggestion systems, for new and improved ways of doing their job. Employees at Corning Canada Inc., for example, submit their suggestions to their supervisors, who review them formally and give feedback directly to the employee. Contrast this with the traditional suggestion box, which many employees view as a recycling bin because of the lack of timely feedback.

HR Planning

In a company that has a differentiation strategy and that recognizes people are the key to competitive advantage, HR planning is taken very seriously. For example, at Sumitomo Metals in Japan, the business planning group reports to HR because the company understands that identifying what needs to be done is less difficult than planning how to do it.

Succession management is critical as employees have to possess many attributes to move ahead in the organization. Thus, a strong emphasis on developing skills for the future is part of the promotion policy. Investments in career moves, training, and developmental experiences are substantial. Long-term job security and reciprocal loyalty are the norm.

Selection

Companies with a differentiation strategy need employees who have a broad range of skills and the ability to learn from others. An innovative atmosphere requires employees who are self-motivated and do not require a great deal of supervision. Employees are selected for their abilities to think creatively, to be flexible in work attitudes, and to be able to work in teams. However, selection for these characteristics is more difficult and usually involves team interviews and behaviourally based evidence of innovative performance. Employees are normally recruited through reputation (word of mouth) or through graduate schools. Some testing for creative ability may be used.

Compensation

Compensation plans affect employee behaviour more directly than most HR practices. For example, Drucker describes a compensation scheme he implemented at

General Electric (GE) in which pay for performance was based only on the previous year’s results. As such, for ten years, GE lost its capacity for innovation because investing in innovation affects expenses and decreases profits, so everyone postponed spending on innovation.

However, compensation is carefully designed in firms that have a differentiation strategy. Pay rates may be slightly below average market rates but there are sub- stantial opportunities to increase those base levels through incentive pay. Pay for performance is a large part of the compensation package and will be dependent on indi- vidual, group, and corporate results. These results are a combination of process and financial criteria and are set in advance, usually on a yearly basis.

There is a more varied mix of types of compensa- tion; individuals may receive salary, bonus, or stock option incentives. Internal equity is of greater concern than equity with the external market. Egalitarian pay structures are associated with greater product quality. Nonmonetary rewards also play a larger role in HR strategy in these types of firms. At Honda, the team that designs a unique transportation vehicle is awarded a trip to Japan.

Training

Companies with a differentiation strategy have a strong training team. The focus of training is on both skills and attitudes. Process skills, such as decision making, the ability to work in teams, and creative thinking, are emphasized as much as skills needed for the current job. The training itself is seen as an opportunity to generate new ideas and procedures. Indeed, customers and cross- functional teams might be included in the training program. Developmental experiences are encouraged. The value of working in another division or another country is recog- nized and encouraged. Employees receive promotions or other job opportunities based, partially, on their willingness to undertake training and their track record in learning.

Performance Evaluation

In companies with a differentiation strategy, performance appraisal is based not on short-term results but instead on the long-term implications of behaviour. Processes that are deemed to lead to better results in the long term are rewarded. Thus, companies encourage and appraise attitudes such as empowerment, diversity sensitivity,

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Strategic Human Resources Planning NEL42

and teamwork in an effort to build future bottom-line outcomes. Working beyond the job is encouraged, not punished. Failure is tolerated, although management tries to distinguish between bad luck and bad judgment or stupidity.

Evaluation tends to be based on a mixture of indi- vidual and group (and sometimes corporate) criteria. Thus, an individual might be evaluated on his or her ability to achieve results and to work as a member of the team, the group’s performance might be measured against estab- lished quotas, and the company might be measured in terms of its overall financial performance.

Appraisals that include input from employees, func- tional experts, peers, and so on—360° evaluations—are

the norm. Organizations in the service sector are more likely to include customers as sources of input for per- formance appraisal.

Labour Relations

Any structure or process that reduces the capacity to be innovative and flexible is difficult to tolerate. Traditional unions, with rigid collective agreements, are encouraged to work collectively toward a new union–management relationship. This relationship is characterized by shared information such as open books, shared decision making about best approaches, and shared responsibility for solving problems as they arise.

Sources: Adapted from R.S. Schuler and S.E. Jackson, “Linking Competitive Strategies with Human Resource Management Practices,” Academy of Management Executive, Vol. 1, No. 3 (1987), pp. 207–219; D. Ulrich, “Using Human Resources for Competitive Advantage,” in R.H. Kilman and I. Kilman, eds., Making Organizations Competitive, San Francisco: Jossey Bass, 1991; P.F. Drucker, “They’re Not Employees, They’re People,” The Harvard Business Review, Vol. 80, No. 2 (2002), pp. 70–77; and M. Belcourt and S. Thornhill, “Growing from the Inside Out: Human Resources Practices for Growth Strategies,” Proceedings of the Administrative Sciences Association of Canada, 1999.

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Luxury retail stores are an example of a differentiation strategy.

But another perspective reverses this view, suggesting that employee competencies determine the business strategy.

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NEL 43CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

HR COMPETENCIES LEAD TO BUSINESS STRATEGY A competing view states that an organization cannot implement a strategy if it does not have the human resources necessary. Currently, companies are scrambling to find qualified workers in many fields, as discussed in Chapter 6 on labour supply.

Small businesses seem to be better at this second approach. The owners of very small businesses are nimble and quickly recognize that if an employee has a certain capability, it can be exploited to develop new products or services. Diversity management efforts are currently building on this theme. For example, if the number of employees who speak Mandarin reaches a sufficient number within an organization, the observant executive will start to explore Asian markets.

This “skills determine strategy” outlook relies too heavily on employee capabilities and not enough on environmental analysis; nor is consideration given to changing HR practices in training or compensation to facilitate this change in strategy.

These perspectives represent two extremes on a continuum between organiza- tional strategy and HR practices. The reality is closer to the concept of reciprocal interdependencies.33

RECIPROCAL INTERDEPENDENCY BETWEEN HR STRATEGY AND BUSINESS STRATEGY An emerging perspective sees HR strategy as contributing to business-level strategy and vice versa. Increasingly, in large firms, senior HR vice-presidents are asked not only to review business plans to ensure consistency with HR strategy but also to provide input to this strategy based on HR strengths and weaknesses.

In this context, an organization chooses a business strategy, such as being a leader in innovative products, based on its in-house, highly educated, trained employees who have been socialized to value creativity. Simply phrased, an organization develops its employees and then capitalizes on their skills; the employees then learn new skills, and so it continues. In many ways, HR strategy generates the business strategy, and business strategy determines HR strategy. This concept of reciprocal interdependence is widely accepted in the HR strategy literature.34

An emerging view is that HR should build its strategies by starting with the issues facing the business. All HR programs should be created to solve real business problems and add value, thus becoming indistinguishable from the business.35

HR BECOMES A BUSINESS PARTNER The key point here is the concept of concurrent strategy formulation. Strategy develop- ment is conducted at the same time that HRM issues are considered. The HR senior management team moves from outsider status to insider status. The implications are not trivial; HR managers must understand the numbers language of business or the outcome expectations of nonprofit organizations. They must be able to understand analyses presented by marketing, financial, and operational managers. Cost–benefit assessments of options within the HR domain will have to be prepared and defended. Entrepreneurial instincts will have to be sharpened, as HR managers will be expected to engage in scanning HR capabilities for business opportunities in this two-way approach

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Strategic Human Resources Planning NEL44

to strategic HR planning. An example of this occurred when an organization was experiencing a rapid downward spiral in business. The traditional HR response would have been to prepare for downsizing the workforce. Instead the HR manager created a unit to lobby—successfully—the government to support two major contracts, using their employees’ unique competencies.36

Alternative solutions to problems have to be generated. For example, if the low-cost strategy depends on hiring personnel at minimum wage, HR managers have to develop strategies to deal with rapid training and high turnover rates. This option will have to be compared with outsourcing, use of robots, or even increasing wages to reduce the costs of turnover. The HR manager is no longer the auditor, but a partner and problem solver. Linkages between the HR manager and other managers, both formal and informal, ensure that this partnership role is enacted.

// STRATEGIC PARTNERING Human resources professionals recognize the need to play a more strategic role within the organization. Although about 55 percent of HR managers are playing that role now, execu- tive teams expect most of them to be more strategic and to demonstrate added value over the next five years.37 Why do executives ignore HR’s contribution to strategy? Some argue that it is because management is not satisfied with HR services in general; that “people” issues belong only to HR, and HR can take care of any problems in executing the strategy. Surveys have found that CEOs want HR to be business people first, then HR leaders. CEOs wish that HR executives would be less concerned with narrow HR policies and processes and focus on answering the question, “Do we have the organization design and people to achieve our plan?”38 Boards of directors are demanding that HR departments provide them with information outlining the links between strategy and workforce implications.39

These attitudes are changing, as organizations realize the impact that HRM strategy can have on organizational effectiveness and as HR managers develop the internal relationships to ensure that the strategy is effective. However, you cannot just ask to be on the executive team; you have to prove yourself. HR Planning Notebook 2.2 poses the question, “Are you a strategic partner?”

HR PLANNING NOTEBOOK 2.2

ARE YOU A STRATEGIC PARTNER?

Do you understand the business? What financial indicators are important to the company? Who are your customers, and what is your competitive advantage? What major tech- nological changes will affect your work?

Do you know what the corporate plan is? Can you quickly list the major initiatives of your organization?

Do you align HR programs, policies, and practices with organizational strategies and goals? How can HR position the organization to succeed? Are the people management processes focused and measured on deliverables and not

functions? Does HR report on effectiveness (the impact that the training program had on employee behaviour) or just efficiencies (such as the number of people being trained)?

Are major organizational decisions made with your input? Are you on the executive team? Are you part of the strategic planning process?

Count the number of times you answered yes. The higher the number, the greater the likelihood that you are a strategic partner or have the ability to be one.

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NEL 45CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

// BECOMING MORE STRATEGIC HR departments are restructuring in order to be able to do the basics right (payroll, safety training, and so on) while enhancing the performance of business units and supporting strategic moves. Traditionally, HR has been organized into functional units (training, com- pensation, and so on). However, there are some more innovative practices, where the unit is organized according to the services provided, as outlined in HR Planning Notebook 2.3.

HR PLANNING NOTEBOOK 2.3

A STRATEGIC VISION OF HR

Corporate HR

The key officer functions as a practice director, similar to what is found in consulting companies, and is on the exec- utive team. Studies in the United Kingdom and Australia show that companies that included the HR director on the executive team experienced twice the growth in earnings per share compared to those who did not.40

Services Inc.

The part of HR that is administrative, estimated to be 60 percent to 70 percent of HR work, is located in a sepa- rate unit called Services Inc. The administrative burden is reduced through call centres and use of the Internet and intranet. The type of HR work done in Services Inc. includes compensation and benefits administration, training and education administration, staffing administration, and records management. There are three levels of service: Tier one is accessed by computer or telephone, and deals with minor things such as changes in addresses; everything is processed without human intervention. Tier two directs HR requests for information not listed on Tier-one sites— such as questions about retirement eligibility or finding a course on innovation—to a call centre that can provide a quick response or explanation. Tier three comprises case workers—highly skilled professionals—who provide exten- sive and comprehensive assistance to complex issues such as employee terminations or employee assistance.

Services Inc. is driven by cost reduction—it has to be the lowest cost and most efficient provider of ser- vice, whether outsourced or provided in-house. It may be located in Information Services or wherever appropriate

as part of an organization-wide effort to provide services through the centralization of technology and call centres.

Solutions Inc.

This branch of corporate HR consists of HR subject-matter experts—all of whom possess professional credentials acquired through advanced study and extensive experi- ence. Their role is to transform the organization through training and development, labour relations, compensation design, strategic staffing, and organizational development. They are responsible for creating solutions to organiza- tional problems and for preparing the organization to achieve its strategic intents. These experts act like con- sultants to the organization and operate on a for-profit basis—that is, their efforts are measurable and must result in an increase in performance measures. The consultants are on the cutting edge of research and put innovative, state-of-the-art theories into practice.

Organization Capability Consultants

Operating as the third branch of corporate HR, the HR professionals in this unit are dispersed throughout the orga- nization, providing guidance and assistance to operating units, with the goal of improving the effectiveness of the organization. If asked questions about changing benefits or dealing with a potential unionization threat, they provide the link to the contact numbers for Services Inc. or Solu- tions Inc. They build organizational capabilities by aligning HR strategies, processes, and practices with the needs of the business. Their HR solutions should change existing processes to create “better-faster-cheaper” approaches.

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Strategic Human Resources Planning NEL46

It seems feasible to design HR policies to match strategy, but what happens when an organization has more than one business strategy and more than one HR strategy? We attempt to answer that question in the next section.

// HR STRATEGY DIFFERENTIATION Firms with more than one business strategy are likely to have more than one approach to HR strategy. As different divisions are responsible for realizing different aspects of the strategy, employees in different divisions may be encouraged to display different behaviours through appropriate HR practices. The challenge is to treat employees across divisions in an equitable fashion while motivating different behaviours that align with the divisions’ strategies or functions. For example, 3M adopted HR practices that support innovation in the research and development branch while adopting policies that support low costs in the manufacturing branch. But to achieve equity, the company cultivated a culture of trust by implementing a series of HR practices such as educating employees on company’s mission and objectives, ensuring compensation fairness, and facilitating communication to enhance employee engagement and perception of fairness.41

Recently researchers have suggested that HR strategy can be further differentiated based on jobs/positions within divisions. From a strategic perspective, different positions assume different roles in strategy implementation. Two considerations are (1) when a position is directly responsible for creating the strategic capabilities of the business; and (2) when different job holders may vary substantially in their job performance, then the position is considered a strategic position.42 For example, at Big Pharma, the strategic capability of the business is new product development, thus the R&D scientists would assume the most strategic role. Walmart’s strategic capability is its distribution and logis- tics systems that allow it to achieve high efficiency at low costs, thus the distribution and logistics specialists should be considered strategic positions. Organizations should have a special HR strategy for these strategic positions to ensure that they can attract, motivate, and retain top players in these positions.43

From a human capital perspective, even within the same positions, some individuals may deserve differential HR strategy than others for two reasons—because their human capital is (1) valuable to the business strategy and (2) unique (hard to replace).44 For example, R&D scientists who have desirable skills in new product development in a particular domain, or founding members who have extensive experience within the company, may deserve differential HR management.

HR Planning Today 2.2 illustrates how Canadian companies are differentiating talent.

Human capital was found to be significantly related to organizational performance, particularly when the human capital was unique to the organization.45 The basic pre- scription is to design HR programs that support the business strategy.

CHARACTERISTICS OF AN EFFECTIVE HRM STRATEGY The purpose of HR strategy is to capitalize on the distinctive competencies of the organization and add value through the effective use of human resources.46 Effective HRM strategies include external and internal fit, and a focus on results.

Fit is an important consideration when designing HR programs. We look at two important types of fit: external fit and internal fit.

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NEL 47CHAPTER 2 Aligning HR with Strategy CHAPTER 2 Aligning HR with Strategy

EXTERNAL FIT

HR programs must align with or fit the overall strategy of the organization. If the business strategy is to differentiate from competitors based on superior service, then selection and training programs should be developed to hire and train people in the skills and behaviours necessary to deliver superior service. Fit with other functional

HR PLANNING TODAY 2.2

HOW CANADIAN COMPANIES DIFFERENTIATE

The Conference Board of Canada found that employers are segmenting workers by these categories.

• Hot skills: skills that are in short supply and high demand in the labour market

• Mission critical skills: capabilities needed within an occupation (leadership skills)

• Mission critical roles: these are highly skilled, highly trained individuals who drive organizational value

• Key job family positions: these workers are well trained on core organizational processes, but are more easily replaced

• Contingent labour: temporary, demand-based and project-based workers

Source: The Conference Board of Canada, 2017, HR Talent Management Benchmarking, 4th edition, p. 65.

These workers are trained to provide excellent customer service in support of a marketing promise of 24-hour support.

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Strategic Human Resources Planning NEL48

strategies is as important as fit with business strategies. HR senior management must be included in strategy discussions to be sure this happens. This is sometimes called the “best fit” approach to strategic HR, where HR strategies match organizational strategies.

INTERNAL FIT

We look at two types of internal fit: a fit with other functional areas, such as marketing, and a fit among all HR programs. Fit with other functional areas is important. If the marketing department is developing an advertising plan that promises access to 24-hour customer service representatives but the HR plan does not include compensation dif- ferentials for shift work, the overall marketing strategy might fail.

HR programs must also be consistent with each other. That is, training, selection, and appraisal must work together to support a strategy. If the customer service representatives use technology, then the staffing department must hire people either who are computer literate or who have the kinds of intelligence that enable them to learn computer skills rapidly. This working together is commonly referred to as “bundling” HR practices. The “best practices” approach, in which bundles of HR practices are internally consistent, suggests that there is a direct relationship between an internally consistent bundle of HR practices and firm performance.47 If an organization adopts one best practice, such as structured interviewing, without adopting bundles of best practices that align with it, it will not increase the impact in a synergistic manner. However, there is disagreement as to what, exactly, these best practices are.48

FOCUS ON RESULTS The hard work of deciding on strategy is not its formulation but its implementation and the tracking of results. Many HR managers do not have the resources or skills to measure results to see if the goals have been achieved. Unless the strategy contains performance measures—that is, is results oriented—it will be difficult to know how successfully the strategy was implemented. Chapter 14 presents various methods for evaluating programs.

Many HR programs are described as solutions looking for problems. Although HR managers insert the word “strategic” in front of HR programs, they fail to demonstrate the link to results. Before any HR program is introduced, the following chain needs to be developed.

! ! ! HR program employee human capital and behaviours

organizational strategy organizational outcome

So, if the overall corporate outcome for a retailer is “growth in sales,” and the strategy to do this is through customer service (a differentiation strategy), then what employee human capital and behaviours are required? If, for example, product knowledge and sales skills are needed, then HR programs could be designed to select and/or develop these skills.

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49CHAPTER 2 Aligning HR with Strategy NEL

// SUMMARY Strategic HRM is a set of distinct but interrelated philosophies, policies, and prac- tices with the goal of enabling the organization to achieve its strategy. HR strategy is embedded in theories of the resource-based view of the firm, the behavioural perspective, and the human capital approach. By involving HR in discussions of strategic policies, an organization has a better chance of being effective in the implementation of these policies. There are various approaches to linking HRM strategies to organizational strategies. We can start with the corporate strategy that leads to the HR strategy, or start with the HR competencies that lead to the business strategy, or use a blend of the interrelationship of the HR strategy and the corporate strategy. Aligning HR strategy with the corporate strategy and with other functional strategies is important.

KEY TERMS human capital p. 33 strategic HRM p. 30

DISCUSSION QUESTIONS 1. “Employees are our biggest asset.” “Yes, but they can walk out the door any time

and all your investment in them will be lost.” Explain why investments in human capital are important. Using the example of a great coach, explain why all is not lost if some of the team members quit.

2. You and your friend decide to open a high-end restaurant specializing in cuisine from your home country. This type of food may appeal to people in the neighbourhood, but you will need to differentiate this restaurant from others, and offer great service, with explanations, customization etc. Describe the ways in which you would use HRM programs to train the waiters.

3. HR Planning Notebook 2.1 outlines some barriers to HR planning. In a group, can you think of ways to overcome or bypass these barriers?

EXERCISES This chapter outlined how organizations must align HR programs (and therefore employee behaviours) with corporate strategy, using predominantly businesses as examples. But here are two mini-cases about how sports (tennis and baseball) can use the same principles of HR planning to achieve goals.

1. Canada had never had a tennis player in the top 10 rankings of the best players in the world. And yet, in 2014 Milos Raonic was ranked 6, Eugenie Bouchard was ranked 7, and Vasek Pospisil won doubles at Wimbledon. Was this just a lucky streak of talented players emerging? Not at all. It was a plan, started 10 years ago. First, Tennis Canada built two excellent tourna- ment facilities: The Rexall Centre in Toronto and the Uniprix Stadium in

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50 NELStrategic Human Resources Planning

Montreal, generating more revenue and more sponsorships. Money avail- able for player (talent) development soared from $4 million to $12 million. But other countries had even more money to spend on player development. So the next steps were critical to the success. Tennis Canada established a national training centre in Montreal, recruited a coach who had coached top players in Europe, and selected only 10–12 adolescents who had demon- strated exceptional skills and motivation, who go to school in the morning, and then spend 5 hours training in the afternoon. They are supported exten- sively, with coaching sessions in Europe, and travel to tournaments around the world. And this new plan worked! Check out the new talent emerging from this pipeline and making headlines in Canada. http://www .tenniscanada.com. What are the important behaviours for sports players in individual (not team) sports? What (HR) programs can be used to generate these behaviours?

2. Traditionally, Major League Baseball scouts chose players for their future potential, and selection decisions were made on gut instinct. Bill James studied baseball statistics for three decades and developed a method called Sabermetrics (based on rigorous statistical analysis) to determine a player’s true value to the team. Sabermetrics is a process that analyzes past perfor- mance statistics (such as batting averages, earned run averages, bunting, stealing, getting on base etc.) and links these to winning scores. These find- ings were not accepted until Billy Beane of the Oakland Athletics put Saber- metrics into practice. Watch the biographical sports movie Moneyball (2011) and learn about this approach. Identify the key competencies/capabilities of players that Billy Beane sought. Did they support the competing strategy of the Oakland Athletics?

CASE STUDY LINKING HR PRACTICES TO PERFORMANCE

Five Star, a luxury hotel in Auckland, New Zealand, was established in the early 1980s, renovated in the mid-1990s, and basically had not changed since. Competi- tion was increasing as three more luxury hotels had opened in the area. The owners reacted by trying to upgrade the hotel and improve the customer service. In the hotel sector, customer service is the only differentiator from other hotels.

The owners created a vision statement that included a strategy for achieving their vision:

Five Star is to be recognized as the finest five-star property in Auckland and a business leader in the hospitality industry. We will achieve this vision by recruiting and developing customer-focused employees who provide the highest level of guest service and by providing the highest amenity level of any hotel in Auckland.

By improving customer service, the owners hope to increase customer satisfac- tion and impact financial performance—the value chain, as demonstrated below:

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51CHAPTER 2 Aligning HR with Strategy NEL

Other Factors Physical property

Amenities

Key HRM Policies and Practices

Training Selection Orientation Performance appraisal Incentive compensation

Skills Knowledge Attitudes

Employee Commitment

Employee satisfaction index (ESI)

Employee Competencies

Trained staff %

Customer Satisfaction

Overall guest satisfaction (OGS) Return guest %

Financial Performance

Revenue per available room (RevPAR) Gross operating profit (GOP)

FIGURE 2.2

MANAGEMENT POLICIES AND PRACTICES IN A QUALITY-FOCUSED HOSPITALITY INDUSTRY STRATEGY

Source: P. Haynes and G. Fryer 2000 “Human Resources, Service Quality and Performance: A Case Study,” International Journal of Contemporary Hospitality Management, Vol. 12, No. 4, pp. 240–248. © Emerald Group Publishing Limited. All rights reserved.

// REFERENCES 1. Jackson, S.E., and R.S. Schuler. 1995. “Understanding Human Resource

Management in the Context of Organizations and Their Environments.” Annual Review of Psychology, Vol. 46: 237–264.

2. Lawler, E.E., A.R. Levenson, and J.W. Boudreau. 2004. “HR Metrics and Analytics: Use and Impact.” Human Resource Planning, Vol. 27, No. 4: 27–36.

QUESTIONS 1. Develop a list of the competencies (skills, knowledge, and attitudes)

that employees of this hotel need to demonstrate in order to become excellent at customer service.

2. Design the HRM selection, orientation, training, performance manage- ment, and incentive compensation program that will develop these competencies.

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52 NELStrategic Human Resources Planning

3. Roos, G., L. Fernstrom, and S. Pike. 2004. “Human Resource Management and Business Performance Measurement.” Measuring Business Excellence, Vol. 8, No. 1: 28–37.

4. Ruona, W.E.A., and S. K. Gibson. 2004. “The Making of Twenty-First Century HR: An Analysis of the Convergence of HRM, HRD and OD.” Human Resource Management, Vol. 42, No. 1: 49–66.

5. “The New HR Executive.” Corporate Leadership Council, September 2000. 6. The Conference Board of Canada. June 2010. “Valuing Your Talent: Human

Resources Trends and Metrics.” 7. Ferris, G.R., A.T. Hall, M.T. Royle, and J.J. Martocchio. 2004. “Theoretical

Development in the Field of Human Resources Management: Issues and Challenges for the Future.” Organizational Analysis, Vol. 12, No. 3: 231–254.

8. Pfeffer, J. 1995. “Producing Sustainable Competitive Advantage through the Effective Management of People.” Academy of Management Executive, Vol. 9: 55–72.

9. Combs, J., Y. Liu, A. Hall, and D. Ketchen. 2006. “How Much Do High Performance Work Practices Matter? A Meta-analysis of Their Effects on Organizational Performance.” Personnel Psychology, Vol. 59: 501–528.

10. Collis, D.J., and C.S. Montgomery. 2008. “Competing on Resources.” Harvard Business Review, Vol. 86: 140–150.

11. Amit, R., and M. Belcourt. 1999. “Human Resources Processes as a Source of Competitive Advantage.” European Management Journal, Vol. 17, No. 2 (April): 174–181.

12. The Conference Board of Canada, June 2010. 13. Teece, D.J. 2007. “Explicating Dynamic Capabilities: The Nature and Micro-

foundations of (Sustainable) Enterprise Performance.” Strategic Management Journal, Vol. 28: 1319–1350.

14. Chadwick, C., and A. Dabu. 2009. “Human Resources, Human Resource Management, and the Competitive Advantage of Firms: Toward a More Comprehensive Model of Causal Linkages.” Organization Science, Vol. 20: 253–272.

15. Paauwe, J., and P. Boselie. 2003. “Challenging Strategic HRM and the Rel- evance of the Institutional Setting.” Human Resource Management Journal, Vol. 13, No. 3: 56–70.

16. Weatherly, L. 2003. “Human Capital: The Elusive Asset.” SHRM Research Quarterly (Society for Human Resources Management).

17. Becker, B.E., and M.A. Huselid. 1999. “Overview: Strategic Human Resources Management in Five Leading Firms.” Human Resource Management, Vol. 38, No. 4 (Winter): 287–301.

18. Hoskisson, R.E., M.A. Hitt, and R.D. Ireland. 2004. Competing for Advantage. Mason, OH: Thomson South-Western.

19. Schuller, R.S., and S.E. Jackson 2005. “A Quarter-Century Review of Human Resource Management in the U.S: The Growth in Importance of the International Perspective.” Management Review, Vol. 16, No. 1: 11–35.

20. The Conference Board of Canada, June 2010.

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53CHAPTER 2 Aligning HR with Strategy NEL

21. Wright, P.M., D.L. Smart, and G.C. McMahan. 1995. “Matches between Human Resources and Strategy among NCAA Basketball Teams.” Academy of Management Journal, Vol. 38, No. 4: 1052–1074.

22. Liao, H., K. Toya, D.P. Lepak, and Y. Hong. 2009. “Do They See Eye to Eye? Management and Employee Perspectives of High-Performance Work Systems and Influence Processes on Service Quality.” Journal of Applied Psychology, 94: 371–391.

23. Malley, M.O., and E. Lawler. 2003. “What Is HR Good for Anyway?” Across the Board, Vol. 40, No. 4: 33–38.

24. Schuller and Jackson, 2005. 25. Subramony, M. 2009. “A Meta-analytic Investigation of the Relationship

Between HRM Bundles and Firm Performance.” Human Resource Manage- ment, Vol. 48: 745–768.

26. Ulrich, D., and N. Smallwood. 2004. “Capitalizing on Capabilities.” Harvard Business Review (June): 119–127.

27. Zedeck, S., and W.F. Cascio. 1984. “Psychological Issues in Personnel Deci- sions.” Annual Review of Psychology, Vol. 35: 461–518.

28. Workforce Planning Practices in Canada: Human Resources Trends and Metrics, 4th ed. 2017. The Conference Board of Canada, May 18, 2017. Report by Jane Cooper and Shannon Jackson.

29. Schuler, R.S., and S.E. Jackson. 1989. “Determinants of Human Resources Management Priorities and Implications for Industrial Relations.” Journal of Management, Vol. 15, No. 1: 89–99.

30. King, A.S. 1995. “Multi-Phase Progression of Organizational Ideology: Com- mitment.” Mid Atlantic Journal, Vol. 31, No. 2: 143–160.

31. Workforce Planning Practices in Canada: Human Resources Trends and Metrics, 4th ed.

32. Lengnick-Hall, C., and M. Lengnick-Hall. 1990. Interactive Human Resource Management and Strategic Planning. New York: Quorum Books.

33. Anderson, W. 1997. “The Future of Human Resources: Forging Ahead or Falling Behind?” Human Resources Management, Vol. 36, No. 1 (Spring): 17–22.

34. Lengnick-Hall, C., and M. Lengnick-Hall. 1990. Interactive Human Resource Management and Strategic Planning. New York: Quorum Books.

35. Bamberger, P., and A. Feigenbaum. 1996. “The Role of Strategic Reference Points in Explaining the Nature and Consequences of Human Resources Strategy.” Academy of Management Review, Vol. 21, No. 4 (October): 926–958.

36. Wright, P.M., S.S. Snell, and P.H.H. Jacobsen. 2004. “Current Approaches to HR Strategies: Inside-Out Versus Outside-In.” Human Resource Planning, Vol. 27, No. 4: 36–47.

37. Quinn, R.W., and W. Brockbank. 2006. “The Development of Strategic Human Resource Professionals.” Human Resource Management, Vol. 45. No. 3: 477–494.

38. “CEO Perspectives: How HR Can Take on a Bigger Role in Driving Growth.” 2012. Economist Intelligence Unit; The Economist.

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39. HRPA/Knightsbridge. 2011. “The Role and Future of HR: The CEO’s Per- spective.” 2011 Research Highlight: 3.

40. Ernst & Young. 2016. “Adding Value: A Guide for Boards and HR Commit- tees in Addressing Human Capital Risks and Opportunities.” http://www .ey.com/Publication/vwLUAssets/Adding-value-boards-HR-human-capital- risks/$FILE/EY-Adding-value-boards-HR-human-capital-risks.pdf. Retrieved September 20, 2017.

41. http://www.accenture.com. Retrieved April 5, 2006. 42. Schneider, B., and K.B. Paul. 2011. “In the Company We Trust.” HR Maga-

zine, Vol. 56: 40–43. 43. Becker, B.E., M.A. Huselid, and R.W. Beatty. 2009. The Differentiated Work-

force: Translating Talent into Strategic Action. Boston: Harvard Business Press; Huselid, M.A., R.W. Beatty, and B.E. Becker. 2005. “‘A’ Players or ‘A’ Posi- tions? The Strategic Logic of Workforce Management.” Harvard Business Review (December): 110–117.

44. Becker, Huselid, and Beatty, 2009; Huselid, Beatty, and Becker, 2005. 45. Lepak, D.P., and S.A. Snell. 1999. “The Human Resource Architecture:

Toward a Theory of Human Capital Allocation and Development.” Academy of Management Review, Vol. 24: 31–48.

46. Crook, T.R., J.G. Combs, S.Y. Todd, D.J. Woehr, and D.J. Ketchen Jr. 2011. “Does Human Capital Matter? A Meta-analysis of the Relationship Between Human Capital and Firm Performance.” Journal of Applied Psychology, Vol. 96: 443–456.

47. Cooke, R., and M. Armstrong. 1990. “The Search for Strategic HR.” Personnel Management (December): 30–33.

48. Buyens, D., and A.D. Vos. 2001. “Perception of the Value of HR.” Human Resource Management Journal, Vol. 11, No. 3: 70–90.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Identify the sources that HR planners use to keep current with business and HR trends.

• Understand how environmental scanning is practised. • Discuss the challenges in scanning the environment. • Explain the environmental factors, such as the economic climate, the political

and regulatory context, and the social and cultural climate, that influence the practice of HRM.

• Describe the role of the stakeholder, and list several examples.

ENVIRONMENTAL INFLUENCES ON HRM

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Strategic Human Resources Planning NEL56

// INTRODUCTION To understand strategic HR planning, we must understand how HRM is affected by the environment in which it operates. Just consider the past decade. Was your life touched by any of these events: the 2017 harassment scandals; the 2014 rise of terrorism; the 2013

General Motors (GM) was, for some business experts, associated with the birth of American capitalism. Back in 1955, the chairman of GM conceitedly stated that “What is good for General Motors is good for America.” But in 2009 GM filed for bankruptcy and then was revitalized through $50!billion in government bailout funds.1 How is it possible that a corporation with money and expertise ended up with just 21 percent market share in 2008, from a position of 50!percent market share 50 years earlier?

Some experts feel that the failure was the myopic views held by management. GM’s managers refused to adjust to a changing world for more than 30 years. GM managers thought that they understood that North American motorists loved big cars. They did not see or did not realize that the rising costs of fuel and increasing environmental awareness of consumers would demolish their core business of gas-guzzling SUVs. Ironically, GM was among the first to introduce the electric car, EV1, in 1996 but abandoned it in 2002 due to its high cost.

GM studied the competition, but in the wrong way. It appreciated the fact that the Japanese had cost and quality advantages, but did not seem to understand how to adapt these techniques to their own plants. To understand the cost advantages, GM purchased Japanese cars and disassembled them, looking for clues that explained their efficiencies. But while GM was studying these cars, the Japanese were already at the drawing board designing the next generation of cars. To rationalize the Japanese quality advantages, GM blamed the workforce and suppliers for quality and tried to “inspect quality” into the final product. They believed that the Japanese were able to produce superior products because their workers were docile and worked 10 hours a day.

GM did not seem to understand how factors can interact. Take, for instance, the interaction between the volume of cars sold and the price of fuel. In 1995, Jack Smith, CEO of GM, told investors to see the potential of the

global market, because the North American market was saturated. He forecasted that GM would sell 10 million cars in China alone. When asked by an analyst, “Do you think that there will be an impact on fuel prices, if millions and millions of cars are purchased in developing countries?” the reply was, “We think that gas supplies will be adequate and gas prices will rise just at the rate of inflation.”

In a reactive way, GM cut fixed operating costs by 22!percent and offloaded its extremely costly health ben- efits for retirees. (GM management had not foreseen the huge costs of these agreements to care for aging retirees, who were more numerous than employees, which added about $1400 to the cost of every vehicle.) But it was too late for GM. Toyota overtook GM as the world’s largest car maker in 2008. When the demand for cars plummeted due to the economic crisis coupled with rising fuel prices, GM could not sustain its cash flow and filed for Chapter 11 reorganization in the United States in 2009. After receiving government bailout, GM was profitable again. Currently, GM is on the rise again, due to increased sales in China, growth in American sales due to hurricane damages, and the potential profits that analysts are seeing in its new electric vehicle and ride-sharing programs.

The auto sector today is transforming rapidly. There are changes in how transportation is viewed in response to erratic fuel prices, energy risks, vehicle safety, and climate change, and consumers are making adjustments through carpooling, biking, and public transportation. Entrepre- neurial ideas may emerge from those outside the auto industry: those who are scanning the environment, reading the trends, and responding innovatively.

Source: Adapted from a July 13, 2008, broadcast of The Michael Enright Show. CBC Radio, available as a podcast; Taylor, Alex, III.

“Gentlemen, Start Your Engines.” Fortune, January 21, 2008: 70; and E. Gourdes, October 16, 2017, “Cramer Explains Why GM Stock Is

Suddenly in Style on Wall Street.” https://uk.finance.yahoo.com/ news/cramer-explains-why-general-motors-223600791.html.

Retrieved October 17, 2017.

ENVIRONMENTAL SCANNING AT GM

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NEL 57CHAPTER 3 Environmental Influences on HRM

floods in Alberta; or the 2008–2009 economic meltdown? HR planners want to track trends that influence the way in which employees can be managed. As a result of 9/11 and SARS, most large organizations now have emergency plans in place for the safety of their employees and buildings.

HR strategists need information about their environ- ment in order to exploit the opportunities or cope with the threats. Environmental factors may influence different industries and businesses in a different way and to a dif- ferent extent. The opening vignette shows that gas price and environmental concerns of customers influenced the strategic planning at GM; similarly, customers’ attitudes toward nutrition and health may influence the business strategy of restaurants and food retailing chains. Being responsive to environmental changes is a prerequisite for building dynamic capabilities and gaining a first-mover advantage. It is important to note that following environ- mental changes is not only general managers’ responsibility, but also the responsibility of HR managers. Fear over pandemics, costs of fuels, technology development, and the demographics of the workforce all directly influence how work should be designed and how HR should be managed.2 Being aware of knowledge workers’ increasing preference for work–life balance and challenges, Google was among the first to create work–life balance programs as well as flexible job design to attract and motivate top talent. This created a competitive advantage in the company’s human resources competency and engagement, which enabled the company to continuously grow and outperform others.

We will look first at the sources and methods HR planners use to track these trends.

// ENVIRONMENTAL SCANNING SOURCES AND!METHODS Managers have to develop strategies and keep a keen eye on what is happening in the world outside the organization. Environmental scanning is the systematic monitoring of the major factors influencing the organization to identify trends that might affect the formulation and implementation of both organizational and HR strategies.

Environment is a fuzzy term; it covers factors as broad as national and multinational contexts that influence an organization. For example, managers are influenced by the cul- ture in which they operate. A manager in Vancouver will treat her employees differently than a manager in New Delhi, and the employees in each city would have expectations about how managers should supervise. Environment also includes industrial environ- ment, such as Porter’s Five Competitive Forces.3 HR practitioners who understand the competitive environment and its implications for their organizations can then develop practices that create competitive advantage.4

The analysis of the external environment consists of these stages:

• Scanning: An attempt to identify early signals of changes and trends in the environment. This information is ambiguous, incomplete, and unconnected.

• Monitoring: A systematic approach to following some key indicators that may affect the organization, such as legislative changes.

Environmental scanning Systematic monitoring of trends affecting the organization

Environmental factors, such as the Calgary flood impact organizational plans.

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Strategic Human Resources Planning NEL58

• Forecasting: After monitoring a trend, an attempt to project the possible impact on the organization.

• Assessing: An attempt to describe the impact of the monitored trend on the organization, and make a judgment of the probability of each of several possible outcomes.5 For example, what would be the impact of a trend in self-driving automobiles?

In the past, HR managers monitored changes that might affect their programs and policies by reading newspapers or trade publications. They kept informed of issues regarding employment laws by subscribing to particular news services, and by being a member of the provincial HR association. The next section describes the sources that HR professionals might use to monitor trends in the environment.

SOURCES OF INFORMATION When developing strategies and determining their likely impact on an organization, HR professionals rely on many sources of information. These include publications, profes- sional associations, conferences and seminars, and professional consultants.

PUBLICATIONS

HR professionals actively scan Canadian newspapers, business publications, and HR magazines, journals, and newsletters. We are fortunate enough to have access to not only a wide range of Canadian sources of information but also the extensive publica- tion network originating in the United States. The authors’ experience suggests that Canadian HR trends lag behind U.S. trends by a year or two. For example, workplace harassment and employee engagement were hot issues in the United States three years before they became important in Canada. Thus, reading U.S. publications acts as an early warning signal for Canadian HR professionals. HR practitioners monitor many of the publications and websites listed in HR Planning Notebook 3.1.

PROFESSIONAL ASSOCIATIONS

Canadian HR professionals and executives belong to a number of organizations that publish newsletters and updates on current events. Many of these, such as the Human Resources Professionals Association, have committees that actively scan the regulatory scene for upcoming changes. Some, like The Conference Board of Canada, conduct research with their members to track trends. Relevant associations are listed in HR Planning Notebook 3.2.

CONFERENCES AND SEMINARS

Most professionals keep current with and even ahead of emerging trends by attending conferences, seminars, and workshops in Canada and the United States. The Human Resource Professionals Association, for example, attracts over 3000 participants to its conference each year. Such events, including those sponsored by private organizations, are widely publicized in HR publications.

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NEL 59CHAPTER 3 Environmental Influences on HRM

HR PLANNING NOTEBOOK 3.1

PUBLICATIONS OF INTEREST TO HR PROFESSIONALS

Canadian

Canadian Business (http://www.canadianbusiness .com)

Canadian HR Reporter (http://www.hrreporter.com)

Canadian Journal of Learning and Technology (http://www.cjlt.ca)

The Financial Post (http://business.financialpost .com/category/executive/careers)

The Globe and Mail Report on Business (http:// www.theglobeandmail.com/report-on-business)

HR Professional Now (http://hrprofessionalnow.ca)

Ivey Business Journal (http://www.iveybusinessjournal .com)

Profit (http://www.profitguide.com)

Workplace Today (https://www.workplace.ca/ magazine)

U.S. and International

Bloomberg Businessweek (http://www.businessweek .com)

Fortune (http://www.fortune.com)

HR Focus (http://www.hrfocusmagazine.com)

HR Magazine (https://www.shrm.org/hr-today/ news/hr-magazine)

People Management (https://www.peoplemanagement .co.uk)

The Economist (http://www.economist.com)

Training (http://www.trainingmag.com)

Research Journals—available through Institutional Libraries

Academy of Management Perspectives

Academy of Management Review

Benefits Canada

Business Horizons

Business Quarterly

California Management Review

Canadian Journal of Administrative Studies

Canadian Labour Law Reporter

Compensation

Compensation & Benefits Review

European Management Journal

Harvard Business Review

Human Resource Management

Journal of Applied Psychology

Journal of Business Ethics

Journal of Labor Research

Journal of Management

Journal of Staffing and Recruitment

Labor Studies Journal

Management Review

Occupational Outlook Quarterly

Organizational Behavior and Human Performance

Personnel

Personnel Journal

Personnel Psychology

Public Personnel Management

Training and Development Journal

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Strategic Human Resources Planning NEL60

PROFESSIONAL CONSULTANTS

Organizations that have an active interest in understanding the influence of potential trends often hire consultants to research or interpret these trends for them. The Hudson Institute is an example of a firm that specializes in this form of consulting. Most

HR PLANNING NOTEBOOK 3.2

ASSOCIATIONS OF INTEREST TO HR PROFESSIONALS

Administrative Sciences Association of Canada (HR Division) Canadian Association of Management Consultants Canadian Council of Human Resource Associations (links to all provincial HR associations) Canadian Human Resource Planners Canadian Industrial Relations Association Canadian Payroll Association Canadian Public Personnel Managers Association Canadian Society for Training and Development

Conference Board of Canada Human Resource Planning Society International Association for Human Resources Information Management Association North American Human Resources Management Association Society for Human Resources Management Society for Industrial and Organizational Psychology World at Work

HR PLANNING TODAY 3.1

THE EXPERTS PREDICT THE FUTURE OF HRM

The Centre for Effective organizations surveyed HR leaders in order to identify trends. Here are the top nine:

TOP HUMAN CAPITAL CHALLENGES IN 2016 (PERCENTAGE OF ORGANIZATIONS; n = 143)

SHORT TERM (12 MONTHS) % LONG TERM (3–5 YEARS) %

Leadership capacity 52 Leadership capacity 48 Employee engagement 43 Employee engagement 34 Capacity to respond to rapid change 39 Changing nature of work and workplace 33 Changing nature of work and workplace 27 Aging workforce 32 Labour cost containment 26 Capacity to innovate 31

Sources: Anonymous, 2016 “9 Emerging Trends” HR Edge, Fall 2016, p. 17; The Conference Board of Canada, 2017, Workforce Planning Practices in Canada: Human Resources Trends and Metrics, Fourth Edition, p. 8.

• Globalization • Mass customization • Social media • Generational diversity • Open innovation • Personal technology • Sustainability • Big data • Gamification

The Conference Board of Canada identified these issues:

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NEL 61CHAPTER 3 Environmental Influences on HRM

organizations have a person on staff, often the librarian, whose job is to bring informa- tion to the consultants’ attention by actively scanning multiple sources.

// METHODS OF FORECASTING HR professionals can use several methods to generate predictions about the future or extrapolate from current events to determine their impact on HR practices. These methods include trend analysis, the Delphi technique, nominal group technique, impact analysis, and scenario planning, which are discussed in detail in Chapter 5. An excellent evaluation of all these approaches can be found in Rothwell and Kazanas.6 The steps of conducting a scenario-based HR planning are outlined in HR Planning Notebook 3.3. Students are invited to experience a scenario-based technique as part of a group exercise at the end of this chapter.

COMPETITIVE INTELLIGENCE Competitive intelligence (or business intelligence) is a formal approach to obtain infor- mation about your competitors. Learning about competitors’ moves early is critical for organizations to respond before the new offering materializes. However, surveys showed that only 23 percent of companies were able to do so.7 The simplest method is to study their websites for information about their strategies and plans for product launches. Other companies train their employees to ask questions from vendors about the purchasing decisions of their competitors. Some organizations hire competitors’ employees to obtain insider information about future plans. These practices border on illegal or unethical. For example, Avon Products once allegedly hired private detectives to search through the dumpsters outside the Mary Kay corporate offices. Information gathered through all these competitive intelligence methods must be subjected to two evaluation questions: Is the source reliable, and what is the likelihood of the information being correct?8

Competitive intelligence A formal approach to obtain information about competitors

HR PLANNING NOTEBOOK 3.3

SCENARIO-BASED HR PLANNING

Step one: Identify three business scenarios that might be played out over the next five years (most desirable case, most likely case, and least desirable case).

Step two: For each scenario, assess the firm’s HR readiness. What are the challenges faced under each scenario (e.g., labour shortages, safety concerns)? Then identify the HR department’s strengths and weaknesses in relation to these challenges.

Step three: Over the next five years, what are the likely trends with rivals, employees, and candidates?

What are the threats posed by rivals? What are the pre- dicted needs and motivations of key employees? What changes do we forecast in the quality and the quantity of our labour pool?

Step four: For each scenario, identify HR initiatives and programs that must be undertaken to deal with the threats and opportunities. For example, to meet a labour shortage of skilled mechanics, a joint program with a com- munity college might be established.

Source: Adapted from P. Boxall and J. Purcell, Strategy and Human Resource Management, 2nd ed. (New York: Palgrave Macmillan, 2008), Figure 11.1, p. 294.

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Strategic Human Resources Planning NEL62

// CHALLENGES IN ENVIRONMENTAL SCANNING There are problems in scanning the environment. These include our inability to accurately predict the future and to isolate what really is important to HR. Can we say what the world will look like in 2050? In 1900, could those working in HRM have predicted what it would look like in 2000? Not likely, because the field of HRM did not exist then. One hundred years ago, there were no payroll and benefits clerks. Even 20 years ago, it would have been difficult to forecast the flattening of organizations; downsizing; the impact of technology, outsourcing, and telecommuting; and a range of other changes we now experience. Most HR strategists limit themselves to a two- to three-year period and extrapolate from current trends.

ISOLATING THE CRITICAL FROM THE INSIGNIFICANT So much change is happening in so many arenas that scanners have trouble picking out the truly important events. For example, which of these HR issues, taken from headlines in HR publications as this text is being written, are critical and which will prove insignificant: Drone delivery? Robots replacing 80 percent of manufacturing jobs? One-third of the workforce selling its time, talent, or products online? Driverless cars? Internet traffic coming from appliances or clothes? A cashless society?9

Four criteria have been suggested for identifying significant trends:10

1. Are there ripple effects (change in one aspect impacts another, such as social networking sites affecting both friendships and professional relationships)?

2. How profound are the impacts on people’s priorities, roles, and expectations? 3. How large is the impact scope (number of people impacted)? 4. Will the changes endure over time?

One difficulty is that few trends exist in isolation—no issue is an island. Take the issue of the difficulty of finding employees where labour shortages exist. There is a growing concern that companies will be unable to find enough tradespeople. If this problem is addressed in isolation, two solutions might be to (1) increase the number of spaces for apprentices in trade programs and/or (2) recruit tradespeople from other countries. But other trends may influence the ability to fill these jobs. The use of robots may change the need for skilled workers. The abolishment of mandatory retirement may encourage more tradespeople to continue working.

Just as there is a reaction for every action, for every trend there is a countertrend, and countertrends seem to develop in tandem with the trends. As globalization increases, so does “localization,” and ethnic pride in customs and culture rises. This is not the same as the idea that the pendulum will always swing back. The current focus on work–life balance cannot be viewed just as a fad, with the resultant expectation that there will be another replacement fad within a few years. The concepts underlying work–life balance will be embedded in our view of work, just as safety and labour laws are now permanently embedded in the culture of work.

We will now examine the major areas that strategists typically scan.

// ENVIRONMENTAL FACTORS HR strategists monitor a number of factors more closely because they are more closely related to HRM. Following this tradition, we have included factors such as the eco- nomic climate, the political and regulatory context, and issues related to technology,

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demographics, and social values and norms. For each factor we have provided some current examples, keeping in mind that such examples quickly lose their relevance. In scanning each factor, we want to consider its potential impact on the organization and strategy in the near and the distant future, and how HRM can be adapted in response to the environmental changes.

ECONOMIC CLIMATE The economic indices we are so familiar with from the media are also important to HR strat- egists. Let us look at a few examples of how these indices influence HR managers who are:

• Concerned with the unemployment rate because it affects their ability to recruit • Worried about the cost of fuel and employees’ willingness to commute • Worried about the value of the Canadian dollar because it affects the compa-

ny’s ability to sell products internationally, and thus affects employment levels • Troubled by the amount of public debt because it affects business taxes, and

therefore a company’s ability to survive and grow • Anxious about interest rates because they affect how much a company is

willing to borrow to grow its business and invest in employees

The recent economic recession, for example, has imposed many changes on HR management in businesses. Many employers try to reduce fixed costs by replacing per- manent jobs with contingent jobs. Surprisingly, this trend applies not only to low-paid, low-skilled workers, but also to high-paid, high-skilled professionals and leaders. Refer to HR Planning Today 3.2 for a discussion on the gig economy.

Deeper and longer recessions may result in permanent job losses as businesses close operations and do not rehire laid-off workers, as would happen in a quicker economic recovery.11

An important role of HR managers will thus entail becoming knowledgeable about outsourcing. Interestingly, a drop in demand for contingent, temporary, and contract

HR PLANNING TODAY 3.2

THE GIG ECONOMY

The gig economy can be described as one in which workers are hired for projects (gigs) and are not employed full time. Because of technology, work does not need to be tied to a time and a place. This is the main explanation for the rise in the use of independent contractors. Experts predict that 40–50 percent of workers will be part of the gig economy by 2020.

These independent contractors are not just clustered at the bottom of the labour pool, such as ride-hailing drivers. Indeed, the rise of the supertemp (those top man- agers and professionals who trained at the best schools and have worked at leading organizations) represents a shift in the labour economy.

Independent workers can be clustered into four categories:

• Free agents who choose this work and derive their income from it (30%)

• Casual earners who use it to supplement their incomes (40%)

• Reluctants who would prefer traditional jobs (14%) • Financially strapped who work like this out of

necessity (16%)

The advantages for organizations are obvious (lower labour costs, reduced benefits, less training, etc.). But

(continued )

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employees (as reported by search and placement firms) can also predict an economic slowdown before these changes are reported by firms in their financial statements.

Other actions that are taken by HR managers to cope with economic uncertainty include linking employee performance with organizational goals; increasing expecta- tions of employee productivity; putting emphasis on succession planning and readiness; investing in leadership development; using noncash rewards such as time off, time flex- ibility, and learning opportunities; and retraining employees for new jobs.12

GLOBALIZATION Another trend to watch is increasing globalization. Globalization is the growth in flows of trade and financial capital across borders. Globalization affects sovereignty, prosperity, jobs, wages, and social legislation. In North America, the North American Free Trade Agree- ment (NAFTA) was established in 1994 among Canada, the United States, and Mexico to gradually remove tariffs and other trade barriers in the region. It has almost tripled the trilateral merchandise trade since 1994 to over $1 trillion in 2016, which has significantly impacted businesses in these three countries. (NAFTA is currently being renegotiated.) The labour market in Canada is also affected—it has been estimated that one in five jobs in Canada is related to international trade.13 This has implications for recruiting and managing international human resources. Compared to the United States in particular, employees in lower-level jobs in Canada on average receive higher pay than their coun- terparts in the United States, while professionals and those in higher-level positions earn less than those in the United States. As NAFTA makes the workforce more mobile across the border, Canadian businesses need to work hard to retain the best knowledge workers.

The shift in the global economy has also been marked by the rapid growth of emerging economies such as India and China. These countries had workers who were willing to work longer hours for less money than workers in more developed coun- tries. McDonald’s has a great deal of experience in globalization, and when the com- pany launches a restaurant in a new country, it works closely with all disciplines to “McDonaldize” a team so that they know the business inside out. Eighteen to 24 months before the restaurant is opened, the company starts with HR. Some of the HR challenges McDonald’s has faced in other countries include the fact that part-time employment and multifunctional jobs simply did not exist.14

one issue emerges—how do organizations persuade workers to work when they are needed? Uber employed social and data scientists to solve the problem that drivers have complete control over the hours they choose to drive. So how does Uber motivate them to drive when demand is high? The scientists discovered that drivers were signing off before they reached 25 rides, when they

could earn a bonus. So, the drivers were sent messages such as “You’re halfway there!” Uber also dispatches a new ride for the driver before the current ride is finished. Drivers can also alert the company that they need to be at a certain location by 4 pm (e.g., to pick up a child from school) and Uber will send them clients close to that location.

Sources: N. Titleman Colla, 2017, “So Long, Future of Work…Hello, New World of Work” The Globe and Mail, July 7, 2017, B 12; James Manyika, Susan Lund, Jacques Bughin, Kelsey Robinson, Jan Mischke, and Deepa Mahajan, 2016, Independent work: Choice, necessity, and the gig economy, https://www.mckinsey.com/global-themes/employment-and-growth/Independent-work-Choice-necessity-and-the-gig-economy, McKenzie Global Institute. Retrieved October 17, 2017; and Scheiber, N. 2017, “How Uber uses psychological tricks to push its drivers,” Miami Herald, April 4, 2017, pp. 1B and 2B.

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Globalization issues now include crisis management and evacuation in cases of terrorism, civil war, and the outbreak of infectious diseases, such as Zika. HR managers will need to develop international competencies, as discussed in Chapter 11.

POLITICAL AND LEGISLATIVE FACTORS Governments, municipal, provincial, and federal, can influence the business environment through political programs that result in changes to laws and regulations. For example, governments that wish to create jobs emphasize tax cuts, provide tax incentives to develop jobs, increase job-training opportunities, and create balanced labour legislation. Governments can spur economic growth by reducing the public debt, balancing the budget, and cutting taxes. Such measures encourage businesses to invest in that province (or in Canada as a whole) and encourage consumers to spend, resulting in more jobs.

The employer–employee relationship is governed by a legal framework that includes common law (judicial precedents that do not derive from specific laws), constitutional law (e.g., the Charter of Rights and Freedoms, acts of federal and provincial parliaments), and contract law (e.g., collective agreements). You are probably familiar with some of these laws. For example, each province has employment standards that establish the maximum number of hours to be worked each day and human rights legislation that prohibits discrimination on the basis of sex, race, and so on.

HR professionals need to continuously monitor legislative changes and ensure compliance with legal requirements. For example, the Ontario government is proposing legislation to ensure that seasonal and part-time employees are paid the same wage as those doing the same job on a full-time basis.

The decisions not governed by law are usually governed by morals or an ethical code. The concept of ethics is not as clear as laws are. Ethical and moral decisions and practices go beyond the law, from “you must” to “you should.” An employer can require an employee to work overtime and not pay him or her overtime rates (as required by the law). How? The employer gives the employee the title of “manager” (a category exempted from overtime regulations), even when the employee has no managerial responsibilities. Legal? Maybe, but not ethical.

Ethical issues are sometimes raised and resolved by employees, and sometimes organizations have official policies on ethics. For example, most organizations have explicit guidelines on the kinds of “gifts” (kickbacks) that employees may accept from suppliers. But most HRM ethical decisions are much more complicated. Should a com- pany produce goods in a country that employs child labour? Should an organization eliminate one unit (laying off the staff in the process) only to subcontract the work to an outside supplier that employs workers at one-half the compensation rates? Before government steps in with regulations, one important role of HR is to discourage risky behaviours of executives.15

Politics also play a role. The “America First” policies of American President Trump, combined with his anti-immigration attitudes, have resulted in a rise in applications for Canadian jobs and educational institutions from foreigners.

TECHNOLOGICAL FACTORS Technology is the process by which inputs from an organization’s environment are transformed into outputs. Technology includes tools, machinery, equipment, and soft- ware. Robots are replacing human for repetitive and dangerous tasks. As robots become

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affordable, and artificial intelligence improves its voice recognition, large numbers of workers will be displaced.16

Technology has already had a large impact on HR and is pre- dicted to continue to do so at an even faster pace. Computer net- works and cloud computing make it possible to store and manage unlimited amounts of data. Social media has influenced how orga- nizations recruit, check references, and manage the off-site conduct of their employees.

HR Planning Notebook 3.4 outlines the impact of technology. Every HR function has the potential to become managed

electronically. The trend started with payroll and benefits; now software is used to manage training data and succession manage- ment information. Online counselling for managers is available, and managers can complete performance appraisals interactively. E-learning is the single most used application on the web.17 As the hardware becomes smaller and the software becomes smarter, we can expect most HR functions to be managed electronically. HR professionals will need to become technology savvy and/or learn skills of managing vendors of technology solutions.

As well, HR professionals will need to follow trends in the automation of jobs. For example, the Iron Ore Company of Canada uses automatic driverless trains to move ore from the mines, thus reducing the need to hire drivers. IOC states that if the organization had not adopted automation and new technology, its vacancy rate would be 2000 positions, not the current 200 positions.18

See Chapter 8 for a complete review of HR and IT.

HR PLANNING NOTEBOOK 3.4

IMPACT OF TECHNOLOGY ON ORGANIZATIONS

• Requires changes in skills and work habits of employees: Employees have to be provided with constant training, and skills are no longer viable for decades.

• Elimination of some lower-level positions and layers of management: Routine tasks, normally done by those lowest in the organization hierarchy, are automated, and the surviving employees need more advanced skills. Fewer managers and fewer layers of management are needed.

• Less hierarchy, more collaboration: The adoption of technology decreases the need for management

as a supervisory control technique. Power has shifted from management to technical workers, who hold the knowledge about system processes.

• Telecommuting options: Telecommuting allows employees to locate farther from their offices, and allows employers to choose office facilities farther from major cities.

• Electronic monitoring and employee privacy: Employers monitor email, social media etc. for several reasons, including legal compliance and liability, performance assessment and productivity measures, and security concerns.

Sources: Reh,J., “Your boss is watching you,” http://management.about.com/cs/people/a/MonitorEE062501.htm. Retrieved December 9, 2014; Jeffrey A. Mello, Strategic Human Resource Management, 1st ed., © 2002, reprinted with permission of South-Western, a division of Thomson Learning, www.thomsonrights.com; and SHRM, Workplace Forecast: A Strategic Outlook, 2004–2005, SHRM 2004.

HR professionals can analyze data to track trends and predict employee behaviour.

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DEMOGRAPHIC FACTORS Demographics, the study of population statistics, affect HR profoundly. The increasing number of working women, the greying of the workforce, and the number of generations working together all influence HR practices.

THE LABOUR MARKET

The labour market is the most important demographic factor that should be monitored by HR professionals. A labour market is the area from which an organization recruits its employees. Such an area may be metropolitan, regional, provincial, national, or international. The number of people available for work depends on factors such as the unemployment rate, geographic migration, graduation rates from educational institu- tions, and so on. Demographic issues facing Canadian employers include the underuti- lization of designated groups, especially those with disabilities and Aboriginal people, the impact of the baby boomers retiring and the rethinking of what it means to retire, and the educational choices of young students.

One trend facing Canadian workers is the dramatic reduction in semi-skilled jobs (those requiring a few courses or on-the-job training) in sectors such as manufacturing and resources. These jobs no longer exist and workers do not have the skills to apply for high-skilled jobs such as engineering technicians, for which employers face labour shortages.

Sources for labour will become international. Ford, General Motors, and Nestlé already employ more people outside their countries than within. Employers will go where the skilled employees live. Because of India’s huge population of English- speaking software engineers, companies such as Microsoft have employment centres in India.

Any introductory HR textbook will outline the nature of Canada’s labour market. The labour market influences an organization’s ability to implement strategy. An

organization may decide to enter the high-tech field only to discover itself unable to recruit enough electrical engineers to meet its personnel requirements, and so must abandon this particular strategy. Companies wishing to grow are facing problems in recruiting and retaining qualified scientists and technologists. There is a growing con- cern with the division of labour in Canada: the shortage of people with the right skills who can earn good money and expect benefits, and the surplus of people available to work in “McJobs.” Human Resources and Skills Development Canada (HRSDC), the government department concerned with employment issues, is addressing this concern through its National Skills agenda, which will encourage companies to increase their training budgets by one-third (to be in line with other countries), and by requiring that 65 percent of adult immigrants have postsecondary education.19

DIVERSITY

There is increasing diversity in the workforce. Terms such as minority and majority have lost their meaning. People may object to overly broad classifications such as Asian, pre- ferring, for example, Japanese-Canadian or Korean-Canadian.20 The increasingly diverse workforce demographics present challenges as well as opportunities for organizations to meet their talent needs. The ability of businesses to tap into underutilized pools of highly educated minority groups and effectively manage the diverse workforce will be

Demographics The study of population statistics

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an important source of competitive advantage in the future. Organizations that tracked representation of diversity groups were more likely to do so for new hires (50 percent) than for a leadership succession pool (17 percent). As a result, although visible minori- ties represented 16.3 percent of the overall workforce, only 3.3 percent of senior execu- tives were minorities.21 Given the competition for critical skills, organizations that are able to exploit diverse talent will gain competitive advantage. Organizations may take advantage of inclusion programs, such as catering to communication styles and offering customizable benefits programs to engage different groups.22

GENERATIONAL DIFFERENCES

The supply of baby boomers (those born between 1946 and 1964) exceeds the demand for them in middle management and senior ranks. The combination of the surge of workers in their 50s and the flattening of organizations has created a cadre of plateaued workers who are approaching retirement. Surveys showed that of the 6 percent of the Canadian workforce who were eligible to retire in the next 12 months, only 1 percent expected to retire.23 The Income Tax Act may have to be changed to allow phased-in retirement, and HR planners will have to make work adjustments to accommodate these requests.24

“Baby busters” (those born between 1965 and the mid-1970s) follow the boomers, who have created a bottleneck in the organization. There are far fewer baby busters, and most are very well educated and trained, so can command significant incomes.

Gen X employees (those born between the mid-1970s and 1980) have lived with technology all their lives. They have fewer expectations of organizations and perceive themselves as independent agents. Members of Gen Y, also called Millennials, born after 1981, are completely comfortable with technology and have a more global and tolerant outlook than people older than they. Gen Y employees are not very interested in climbing a career ladder; indeed, they assume that they will change jobs frequently.

Generation Z or iGen (born after mid 90s) value family connections (including a sense of order and predictability), have an ability to multi-task and use social media instead of face-to-face interactions, and can manage both simultaneously, because of their gaming experience.25

For HR managers, an important consideration is how to vary HR practices to engage and motivate these different generations of workers who also have different work values and preferences. HR managers also need to consider how to capitalize on Gen Y employees’ knowledge and skills during the short period when they are hired by the company. Instead of continuing to employ people “from the shoulder down,” HR managers need to unleash individuals’ creativity “from the neck up.”26 Some considerations of intergenerational differences in HR management are outlined in HR Planning Today 3.3. The implication for HR managers is the need for employee segmentation, in the same way that marketers segment customers. HR professionals are often preoccupied with “fairness and equity,” which is often translated into exactly the same policies and programs for all employees. But in the same way that a gardener will give different types of flowers different amounts of water, sunshine, fertilizer etc., in order to create ideal growing conditions, HR managers will have to segment or customize career management models for different types of employees. Instead of an employee value proposition offered by organizations, a personal value proposition will be created.27

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SOCIAL AND CULTURAL FACTORS

RIGHT TO PRIVACY

Society can express its intent through laws and regulations, and in less formal ways within organizations through discipline and terminations. One issue getting more and more public attention is the right to privacy. Does the employer have a moral (and legal) right to monitor employee activities through video surveillance cameras or reading email? Dow Chemical Co. terminated 50 employees and disciplined another 200 because these employees downloaded, saved, or distributed offensive material using the company’s email system. (Those who merely opened and deleted the material were not reprimanded.)28

WORK–LIFE BALANCE

Another issue is the employee’s attempt to balance a personal life with an ever- more-encompassing work life. Research on hours worked indicates that Canadians are spending more time at work. Many employees face the challenge of trying to spend

HR PLANNING TODAY 3.3

WORKFORCE STRATEGIES FOR DIFFERENT GENERATIONS

Source: Adapted from Tapia, A. (2009). “The Emerging Diverse Workforce: Implications of a Global Demographic Tsunami for Organizations in Canada.” Copyright Andrés T. Tapia 2009.

BABY BOOMERS GENERATION X GENERATION Y Communication Show respect

Choose face-to-face Get to the point Use email generally, but face-to-face to deal with issues

Orient them quickly Email and instant messaging are preferred

Development and job design

Acknowledge accomplishments Create an open work environment

Give them space to explore and find solutions Lighten up! Work can be fun

Provide feedback quickly Challenge them Outline the end game for each task

Recruitment Use headhunters Advertise in newspapers

Go through social networks Create employee referral programs

Utilize technology (Facebook etc.) Allow space for parental input

Retention Develop solutions to postpone retirement Highlight value and contributions to the company

Get over the notion of having to pay one’s dues Provide flexible work solutions Set up clear steps for advancement

Find them a mentor Allow them to contribute to the community Introduce new opportunities frequently

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quality time with their families while vigorously pursuing a career. People are generally most active in moving ahead in their careers between the ages of 25 and 45, exactly the stage at which most people raise their children. Both roles are demanding; both require long hours, during the same period (6 a.m. to 10 p.m.). The demographics of the aging workforce mean that working adults will be stressed by the extra demands of caring for their elderly relatives, estimated to consume about 23 hours each month.29 Organizations have responded to this issue by increasing workplace flexibility. Some options include flextime, part-time work, job sharing, telecommuting, elder care, and child care. The issue of employee well-being is also on the collective bargaining table, with unions asking for family support benefits such as subsidies for child and elder care, and access to wellness facilities. Although the unionized workforce is changing to include more women and older workers, many of the traditional union members, such as low-wage and hourly workers, factory and service workers, and outside workers, cannot take advantage of benefits such as flexible work hours, telecommuting, or on- site gyms.

CONTINGENT WORKERS

Another significant trend in Canada is the continuing growth of contingency workers (part-time, temporary, seasonal, and contract workers). These workers may or may not voluntarily choose to pursue contingency employment and experience different work–life challenges than traditional workers.30 For example, research shows that seasonal workers experience fewer developmental opportunities at work and are often treated as “costs” rather than “assets” in organizations. Not surprisingly, they report lower commitment to the organization and focus only on completing their assigned tasks.31 As these contingent modes of employment continue to increase, HR needs to reconsider how to strategically manage these employees to gain competitive advantage. If the organization cannot promise long-term employment, benefits, or develop- mental opportunities, what other practices can be equally effective in engaging these employees?

STAKEHOLDERS In addition to general environment, organizations also need to consider the industrial and organizational environment, particularly the relevant groups in this context. Many groups have an influence on the organization’s strategy. These groups, referred to as the stakeholders, hold expectations of the HR function that can influence HR strategy and practices.

Stakeholders are groups of people who have an interest in the projects, policies, or outcomes of an organization’s decisions. Sometimes called constituent groups, they follow the actions of the organization and lobby to have their interests satisfied. These stakeholders affect strategy formulation. Employees want higher wages and job security, suppliers want longer-term relationships, customers want faster service, and shareholders want more dividends and higher stock prices. Organizations will often adapt their strategies to accommodate powerful stakeholders such as unions, regulatory agencies, or customers. Let us look at some of these organizational stakeholders and their interest in HR.

Stakeholders Groups of people who have vested interests in an organization’s decisions

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THE BOARD OF DIRECTORS AND SENIOR EXECUTIVES

This group develops the vision, mission, strategy, and objectives for the organization. As a group, the HR issues that interest them the most include the workforce implica- tions of strategic options such as restructuring, outsourcing, mergers and acquisitions, and going international (all these HR implications are discussed in separate chapters in this text). They have a particular interest in succession management (Chapter 7) and leadership development.

Much of the research on HR planning recognizes the powerful influence of the CEO on the organization’s ability to attain its goals. The concept of the rational manager is well embedded in our business psyche. We assume that the head of an organization carefully analyzes the environment—looking at competitors’ actions and technological changes—and then decides the best strategy to exploit opportunities and corporate strengths. But hearts may be as influential as heads. Managers are more than rational actors; they have personal values, ethics, attitudes toward risk, and ambition.32

Research has shown that different types of strategies require different types of man- agers and executives. Studies of these managerial elites have found that managers with certain personalities—for example, those with a tolerance for ambiguity—managed firms with a growth strategy more successfully than those with a harvest strategy.33

SENIOR MANAGEMENT

Senior managers are typically responsible to the executives for the execution of the strategy and organizational per- formance. Therefore, they are most interested in the HR programs and practices that affect performance: workforce planning and utilization, incentive compensation, training and development, and performance management systems. They want metrics that spotlight performance indicators such as employee commitment scores, absenteeism, and turnover rate—all discussed in Chapter 14.

SUPERVISORS

This group is responsible for the management of employees and their role in meeting organizational goals. As a group, they want HR to help them with recruitment, selection, com- pensation, training and development, coaching, and policy development. Their needs are often based on individual employee issues such as poor performance (and the need to terminate an employee) or difficulties in recruiting specialists.

EMPLOYEES

Employees want the HR department to expedite their requests efficiently, confidentially, and fairly. They want HR policies that enable them to be satisfied at work, and to develop skills to be able to do their jobs, now and in the

The board of directors develop the vision, mission, and strategy of the organization.

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future. They are concerned with HR policies on compensation, training and develop- ment, health and safety, and overall working conditions.

As has been indicated earlier, sometimes an organization’s strategy is influenced by the kinds of competencies it already possesses. Likewise, strengths can reside in the HR department itself. If the HR department has excelled in its ability to grow rapidly by attracting, hiring, and orienting highly qualified candidates, corporate venturing or a joint venture becomes an attainable goal. If culture management is the HR department’s strength, mergers and acquisitions can be considered a strategic option.

UNIONS

The presence of unions in the environment will affect HRM strategy for firms entering new sectors with high unionization rates. Employees who are currently unionized within an organization can influence strategy in two ways. One is a restrictive way, in which the collective agreement limits an organization’s ability to make drastic changes in working methods or jobs to accommodate changes in strategic direction. A second way is that unions now play a larger role and are more cooperative than adversarial with regard to HR practices such as profit sharing, plant locations, selection procedures, and quality improvement. Savvy HR planners keep track of the policies of key unions such as the Canadian Auto Workers (CAW), because they set the benchmark for hourly workers in Canada. Any innovative benefit will filter through the economy and affect other organizations’ negotiations. The key issues for unions are job security, income security, working hours, and inflation protection.34 Unionized employees receive higher wages and have better working conditions than their non-unionized counterparts.35

RESPONDING TO EXTERNAL FACTORS While it is interesting to attempt to assess all the changing factors that might affect your organization, the reality is that managers have limited time and resources to monitor every- thing. Most organizations use an issues priority matrix to determine which are the important trends that may affect them. Using Table 3.1, managers can then rate, from high to low:

1. The probability of these trends actually occurring 2. The likely impact of each of these trends on the organization

PROBABLE IMPACT ON ORGANIZATION

HIGH MEDIUM LOW

PROBABILITY OF OCCURRENCE

HIGH High priority High priority High priority

MEDIUM High priority Medium priority Low priority

LOW Medium priority Low priority Low priority

Republished with permission of Elsevier, from Long Range Planning, Vol. 17, No. 3, L. Lederman, “Foresight Activities in the USA: Time for a re-assessment,” 1984; permission conveyed through Copyright Clearance Center, Inc.

TABLE 3.1

ISSUES PRIORITY MATRIX

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A PROACTIVE APPROACH Some HR managers do not like passively observing the game through their windows; they want to participate and influence how the game is played. Thus, we find most profes- sional associations have a group that lobbies for legislation that will favour the association membership. Most have public relations firms that try to shape the perception of the profession and its goals (thus influencing public opinion favourably toward regulations).

After the environmental scanning, companies can analyze the business environ- ment to determine the impact on the organization and the actions that the organization needs to take. Organizations can use a SWOT analysis to determine the impact on the organization. HR Planning Today 3.4 describes in detail how the Global Wood Group company scans the external environment to identify threats and opportunities.

Figure 3.1 summarizes the environmental and industrial factors that organizations need to scan and monitor to determine the impact on organizational strategy and HR management. On the basis of these analyses, organizations then further reposition the business competitive strategy and develop competitive advantage, as discussed in Chapter 1.

HR PLANNING TODAY 3.4

THE GLOBAL WOOD GROUP

The Global Group of Companies (https://www.globalfur- nituregroup.com/ca) is a privately owned vertically inte- grated manufacturing organization in the Toronto area. Global Wood, which designs and manufactures office furniture primarily from engineered wood panels, has developed over the past few years into the Global Wood Group, a semi-autonomous division of the Global Group of Companies. On average, over 80 percent of the Global Wood Group’s production is exported to and sold in the United States.

The furniture manufacturing industry in Canada suf- fered from a number of negative external events following the onset of the Great Recession, which resulted in a large number of companies ceasing to manufacture or greatly reducing their Canadian manufacturing operations.

Fortunately, the Global Wood Group had already undertaken a number of proactive measures and these allowed it to largely “weather the storm.” The Human Resources function was revamped with an increased focus on strategic and operational initiatives. Payroll was transferred to accounting and day-to-day benefits admin- istration was outsourced to a third party. Human Resources instead assumed responsibility for leading the develop- ment and implementation of a number of “management systems.”

Environmental scanning is a key component of the Global Wood Group’s strategy, and a requirement for all managers, who meet weekly to review issues, goals, and accomplishments, and to devise upcoming projects. Mana- gerial staff at the Global Wood Group access information from external sources via:

1. Professional associations: Organizations such as the Wood Manufacturing Council and the Canadian Home Furnishings Association and Canadian Manufacturers & Exporters Association lobby governments on behalf of manufacturers. Liaising with these groups provides the Global Wood Group with information; for example, previous changes to American government policy regarding the importation of furniture from Asia and proposed changes to applicable free trade agreements.

2. Trade publications: Publications such as Wood Industry, Woodworking, Materials Management & Distribution, and Woodworking Network reveal infor- mation about new products coming onto the market, new techniques, and the latest offerings of equipment manufacturers.

3. Professional conferences and seminars: At confer- ences hosted by organizations such as the Canadian

(continued )

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Woodworking Council, the American Home Furnish- ings Alliance, and various industry tradeshows, Global Wood Group representatives are able to visit the displays of organizations selling machinery and equipment to furniture manufacturers and to ascertain which companies are purchasing machinery and what production techniques they are using.

4. Participation in a WSIB-approved Safety Group rep- resenting key players in the industry and participa- tion in WSPS-sponsored information and networking sessions.

Through these scanning activities, GW has been able to assess threats and opportunities.

Threats

Policies set by the Provincial Government in Ontario have greatly impacted costs at the Global Wood Group.

1. Increases in the cost of electricity. 2. Elimination of mandatory retirement. Many of the staff

of The Global Wood Group were hired at a relatively advanced age and have chosen to continue working rather than retire.

3. Recent increases in the minimum wage have had an inflationary impact on overall wages.

4. Proposed changes to trade agreements between Canada and other nations.

Other challenges include:

1. A deficit in the supply of skilled tradespeople. Orga- nizations such as the Global Wood Group require maintenance technicians, tool and die makers, cabi- netmakers, and other skills that are increasingly in short supply.

2. Fluctuating currency/exchange rates.

Opportunities

Key strengths and opportunities were identified:

1. Proximity to customers, which enables a rapid response to order fulfillment: The Global Wood Group decreased average turnaround time for orders from the traditional 30 days required by most competitors to shipment within 3 days of receipt of an order.

2. Implementation of internationally recognized man- agement systems, which improved the Global Wood Group’s efficiency by instituting measurement of every factor in the manufacturing process.

a. ISO 9001 Quality Management was the first system implemented. This required that each worker in the manufacturing process complete an inspection on each piece that they handle and stamp the accompanying production sheet with their own individually issued stamp, so that each piece can be tracked. This has allowed the Global Wood Group to decrease defective pieces, reducing customer complaints and rework. Defect rates are now .02 percent of pieces produced.

b. ISO 14001 Environmental Management was next. Reducing the shipment of defective pieces initially resulted in increased scrapping of raw materials. The Environmental Management program con- verted the Global Wood Group to a “zero waste to landfill” mandate. All scrap and waste is recorded and continuous improvement goals set. All staff are responsible for sorting any scrap, recording it and whenever possible finding ways to re-use it. Through rigorous controls, the amount of scrap per unit produced has been reduced by 68.36 percent since the implementation of this program.

As an offshoot of this environmental program the fol- lowing were also implemented:

• An OHSAS 18001 program in occupational health and safety was implemented. This program has resulted in the companies of the Global Wood Group reducing their lost-time injury costs by over 90 percent since the program was initiated and receiving rebates and/or credits averaging over $40 000 each year from the WSIB.

• Finally, faced with increasing electrical costs, an ISO 50001 program was implemented. Using “real time” measuring equipment on each piece of pro- duction machinery, the Global Wood Group is able to determine the cost of energy per unit produced and set ambitious goals to reduce energy per unit produced. Meeting these goals and qualifying for certification to this standard has resulted in signifi- cant cost savings, as well as credits and rebates

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NEL 75CHAPTER 3 Environmental Influences on HRM

from various levels of government and/or govern- ment agencies. To date, only 15 organizations in all of Canada have attained this international stan- dard. Since the implementation of this program, the Global Wood Group has reduced the amount of energy used per unit produced by more than 10 percent from the benchmark production year and has received just under $200 000 in grants and rebates for their energy management proj- ects. As this program matures and as energy costs escalate, the savings will only continue to increase.

Implementation of the Energy, Environmental, FSC, Sustainable Manufacturing, and Corporate Social

Responsibility standards has ensured that the Global Wood Group is qualified as a supplier for numerous government contracts that require compliance to environmental pro- grams and also qualifies the purchasers of Global Wood Group products for LEED credits.

In order to attain certification to these international standards, the Global Wood Group has to have in place formalized policies and procedures, and training programs to track and monitor all aspects of the production process. In addition, each management program requires an annual external audit, conducted by internationally accredited auditors.

Case prepared by Dan McGarry, Vice President Human Resources, the Global Wood Group, 2017.

HR Forecasting and Assessing

• Determining issue priority • SWOT analysis • Scenario planning

Scanning and Monitoring the

Business Environment

• Porter’s Five Forces • Stakeholders (management, employees, unions)

Scanning and Monitoring the General

Environment Economics, globalization, politics

and legislation, technology, demographics, social and

cultural factors

FIGURE 3.1

THE ENVIRONMENTAL ANALYSIS PROCESS

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76 NELStrategic Human Resources Planning

// SUMMARY HRM strategy is determined primarily by organizational strategy. However, environ- mental factors also shape HRM strategy, so HR managers and planners have to continu- ally monitor the environment. Typically, they scan by reading publications, retaining memberships in professional associations, attending conferences, or using professional scanners. A number of methods, such as trend and impact analysis and the Delphi technique, are used to identify future trends. The environmental factors monitored include the economic climate, the political and regulatory climate, and social norms. Stakeholders such as shareholders, unions, customers, and executives contribute strongly to the formulation and implementation of strategy.

KEY TERMS competitive intelligence p. 61 demographics p. 67 environmental scanning p. 57 stakeholders p. 70

DISCUSSION QUESTIONS 1. Search for workplace trends affecting Canadian employers. Using the issues priority

matrix (Table 3.1), rate the probability of these issues impacting your career. 2. Using your school as an example, find one trend in each of the areas (economics,

globalization, political/legislative, technology, demographics and social/cultural) that will impact enrollment in your school.

3. Employees spend an average of 43 minutes a day at work on personal mobile devices. A company in the United States implanted a micro chip in employees (who had volunteered to have this done) to prove the identity of the user and increase security and privacy. What policies should the HR department develop in anticipation of the continuing use of technology?

4. Some HR professionals are suggesting that employers not “stereotype” generations and treat them differently. Argue the pros and cons of establishing different HR policies for different generations.

EXERCISES: SCENARIO PLANNING Practise the scenario planning technique for Amazon using the steps below.

1. Form a group of four to six people. Discuss what Amazon will experience, taking into consideration the changes that may occur in the general environment (economics, globalization, political/legislative, technology, demographics, and sociocultural factors etc.) and Amazon business environment (suppliers, competitors, especially Alibaba; customers, senior management, employees etc.). Identify three business scenarios that might play out in the next five years (most desirable case, most likely case, and least desirable case).

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77CHAPTER 3 Environmental Influences on HRM NEL

2. For each scenario, assess the firm’s readiness. What are the challenges faced under each scenario? Identify HR’s strengths and weaknesses in relation to these challenges.

3. For each scenario, identify HR initiatives and programs that must be undertaken to deal with the changes.

4. Prepare a group report on the future of the job. 5. Present this report to the class.

After the presentations, discuss the challenges of predicting the future in this manner. Should HR planners not scan the environment because of these problems? Is there a better way?

CASE STUDY WORK–LIFE FAMILY BALANCE

Magda Hyshka, manager of HR policies for TelPlus, the largest telecommunica- tions company in Canada, had been asked by her director of HR to develop an innovative policy to address the work–family issues facing the company. As part of her research, Magda uncovered the following facts:

• Workers spend an average of 50 hours a week on job-related activities and more than half bring work home.

• Canadian workers are feeling more stress, caused by an insufficient salary, work overload, and a negative work environment.

• About half of Canadian workers spend 22 hours a week on child care, and about 25 percent spend 9 hours a week on elder care.

• Work–life conflict negatively impacts performance, causing employees to be absent from work, reduce productivity, and increase use of benefits.

• Technology enables employees to work seven days a week and at any time during the day or night, and many felt that they were expected to be avail- able (online) all the time.

• While Canadians are insisting on more work–life balance, Asian workers with equivalent qualifications were willing to work long hours for less than half the pay.

Sources: Duxbury L. & Higgins, C., “Revisiting work life issues in Canada: the 2012 National Study of Balancing Work and Caregiving in Canada,” http://www.healthyworkplaces.info/wp-content/ uploads/2012/11/2012-National-Work-Long-Summary.pdf, retrieved December 1, 2014; Y.A. Laroche, Fine Balance, Ottawa: Canadian Centre for Management Development, 2000; J. Schramm, J. Coombs, and J. Victor, Workplace Forecast, Alexandria, Virginia: SHRM, February 2011; Morrow, J., “Studies stress economic cost of depression in the workplace,” Canadian Occupational Safety Magazine, http://www .cos-mag.com/health-page/health-page-stories/studies-stress-economic-cost-of-depression-in-the- workplace.html, retrieved December 10, 2014.

QUESTIONS

Continue the research started by Magda. Prepare a report summarizing your findings and recommending policies that will help your employees cope with work–family balance issues.

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// REFERENCES 1. http://www.economist.com/node/16846494. Retrieved August 26, 2011. 2. Young, L. 2010. “The New Normal.” HR Professional, February: 24–28. 3. Porter, M.E. 2008. “The Five Competitive Forces That Shape Strategy.”

Harvard Business Review, January 2008. 4. Schuler, R.S., and S.E. Jackson. 2005. “A Quarter-Century Review of Human

Resource Management in the U.S.: The Growth in the International Perspec- tive.” Management Review, Vol. 16, No. 1: 11–35.

5. Certo, S.C., and J.P. Peter. 1993. Strategic Management: A Focus on Process. Boston: Irwin.

6. Rothwell, W.J., and H.C. Kazanas. 1988. Strategic Human Resources Planning and Management. Englewood Cliffs, NJ: Prentice Hall.

7. Coyne, K.P., and J. Horn. 2009. “Predicting Your Competitor’s Reaction.” Harvard Business Review, April: 90–97.

8. Wheelen, T.L., and J.D. Hunger. 2008. Concepts in Strategic Management and Business Policy (11th ed.). Saddle River, NJ: Pearson Prentice Hall.

9. Myers, R., and E. Noel. 2017. “The Canada We Want in 2030 Must Be Debated Today.” The Globe and Mail, September 21: B4.

10. Ofek, E., and L. Wathieu. 2010. “Are You Ignoring Trends That Could Shake Up Your Business?” Harvard Business Review, July/August: 124–131.

11. Ragan, C. 2014. “How to Heal the Deep Scars from the Financial Crisis.” The Globe and Mail, November 18: B2.

12. Schramm, J.J., J. Coombs, and J. Victor. 2011. “Workplace Forecast: The Top Workplace Trends According to HR Professions.” SHRM.

13. http:///www.cfr.org/backgrounder/naftas-economic-impact. Retrieved October 18, 2017.

14. Overman, S. 2002. “HR Is Partner in McDonaldizing Employees in New Countries.” HR News, May: 7.

15. Young, 2010. 16. Joerres, J. 2016. “Globalization, Robots and the Future of Work.” Harvard

Business Review, October: 75–79. 17. http://www.corporateleadershipcouncil.com, June 2002. Retrieved April 5,

2006. 18. Silliker, A. 2011. “Big Role for Automation in Tight Labour Market.”

Canadian HR Reporter, Vol. 24, No. 22: 1–2. 19. Brown, D. 2002. “Ottawa Unveils National Training and Development

Strategy.” Canadian HR Reporter, Vol. 15, No. 5 (March 11): 3, 6. 20. Jamrog, J.J. 2002. “Current Practices: The Coming Decade of the Employee.”

Human Resource Planning, Vol. 25, No. 3: 5–12. 21. The Conference Board of Canada. June 2010. Valuing Your Talent: Human

Resources Trends and Metrics. 22. http://www.hewittassociates.com/Lib/assets/NA/en-CA/pdf/DiversityTapia.

pdf. Retrieved March 31, 2011.

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23. The Conference Board of Canada, June 2010. 24. Langton, J. 2005. “Accountants Offer Two Cents on Aging Workforce.”

Canadian HR Reporter, Vol. 18, No. 4: 3. 25. https://www.knoll.com/knollnewsdetail/generation-z-infographic. Retrieved

October 20, 2017. 26. Adams, A. 2010. “Changing Role of HR.” Human Resources, June: 45–48. 27. Boudrea, J. W., and I. Ziskin. 2011. “The Future of HR and Effective Organi-

zations.” Organizational Dynamics,” 40: 255–266. 28. Currie, M.B., and D. Black. 2001. “Emerging Issues in the Electronic

Workplace.” Ivey Business Journal, Vol. 65, No. 3 (January/February): 18–29. 29. Tomlinson, A. 2002. “Trickle Down Effects of Retiring Boomers.” Canadian

HR Reporter, Vol. 15, No. 11 (June 3): 1, 12. 30. Connelly, C.E., and D.G. Gallagher. 2004. “Emerging Trends in Contingent

Work Research.” Journal of Management, Vol. 30: 959–983. 31. Ainsworth, S., and A. Purss. 2009. “Same Time, Next Year? Human Resource

Management and Seasonal Workers.” Personnel Review, Vol. 38: 217–235. 32. Guth, W.D., and R. Tagiuri. 1965. “Personal Values and Corporate Strategy.”

Harvard Business Review, Vol. 43, No. 5 (September/October): 123–132. 33. Gupta, A., and V. Govindarajan. 1984. “Business Unit Strategy Managerial

Characteristics, and Business Unit Effectiveness at Strategy Implementa- tion.” Academy of Management Journal, Vol. 27: 25–41.

34. Brown, D. 2002. “CAW—Big Three Negotiations Set the Mark.” Canadian HR Reporter, Vol. 15, No. 12 (June 17): 3, 12.

35. Lawler, E.E., and S.A. Mohram. 1987. “Unions and the New Management.” Academy of Management Executives, Vol. 26, No. 1: 293–300.

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NEL

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand what HR forecasting is, and its strategic importance to the firm. • Understand the value of human capital to the firm, and discuss the difference

between generic human capital and firm-specific human capital. • Discuss the differences between stocks and flows of human capital, and

comprehend the implications that stocks and flows have for HR planning. • Understand the rationale for giving special attention to specialist/technical

workers, managers, recruits, and designated groups in the HR forecasting process.

• Comprehend the forecasting process in general, and the categories of forecasting methods.

• Outline the environmental and organizational factors affecting HR forecasting.

CHAPTER

4 THE HR FORECASTING

PROCESS

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NEL 81CHAPTER 4 The HR Forecasting Process

// WHAT IS HR FORECASTING? HR forecasting can be defined as the process of ascertaining the net requirement for human capital by determining the demand for and supply of human resources now and in the future. Forecasting is deeply embedded within the organization’s strategy and structure. Firm strategy and environmental scanning, as discussed in chapters 2 and 3, are important steps in determining the kinds of activities and behaviours that are critical to organizational success. Organization design helps to determine how the knowledge, skills, abilities, and competencies that are necessary to demonstrate the required activi- ties and behaviours are acquired by the firm (e.g., through career development and mentoring, training, or external selection). Forecasting works within these boundary conditions to fulfil the firm’s requirement for human capital.

// THE STRATEGIC IMPORTANCE OF HR FORECASTING A great number of important benefits accrue to organizations that take the time to institute effective HR forecasting processes. Furthermore, the forecasting techniques employed do not have to be sophisticated to be of value to the firm (see HR Plan- ning Notebook 4.1 for a discussion of the primary skills necessary for successful HR

HR forecasting Determining the net requirement for human capital by assessing the demand for and supply of human resources now and in the future

The next four chapters deal with the forecasting aspects of strategic HR planning. These chapters deal with forecasting as a process, with particular emphasis on planning for the anticipated demand for human capital, how that human capital will be supplied to the firm, and the development of human capital within the firm. In a survey of over one hundred and fifty Canadian firms, the Conference Board of Canada found that the most important long-term HR priori- ties reported by organizations are (1) developing leaders, (2) workforce planning, and (3) succession management. All these activities, including leader development and lead- ership development relate to the HR planning area.

While it is clear from these results that HR planning is a top priority, it appears that organizations are not fully prepared to meet the challenge. The organizations partici- pating in the survey also indicated that roughly 50 percent of the firms do not have full-time staff dedicated to work- force planning, and 68 percent lack confidence in their practices and metrics that support workforce planning.

Workforce planning in most Canadian organizations today has a short-term focus (no more than two years), and tends to plan based on the firm’s immediate needs or gaps between human capital demand and supply. These planning activities are based largely on current headcounts of employees or historical requirements for employees. Fewer firms employ more strategic HR planning practices that focus on questions that relate to the business strategy, and how the firm’s human capital needs flow from the strategy. These strategy-based forms of planning take a longer planning perspective, looking two to five years into the future. As HR planning becomes more strategic, the focus moves from headcounts to asking how human capital can be involved in solving organizational challenges that relate to delivering value to the customer.

Source: Courtesy of The Conference Board of Canada, 2017, Workforce!Planning Practices in Canada: Human Resources Trends

and Metrics, 4th ed.

WORKFORCE PLANNING IN CANADA

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Strategic Human Resources Planning NEL82

forecasting).1 In general, forecasting is most beneficial when demand is high for jobs, in particular for specialized jobs. After all, when the labour market is slack and workers are readily available, there is less need to plan in advance. However, when the opposite is true, forecasting can ensure that the necessary human capital is available to the firm, despite its scarcity in the labour market. A few of the other important advantages of HR forecasting are discussed below.

REDUCING HR COSTS

Effective HR forecasting focuses on a comparison between the organization’s cur- rent job-related knowledge, skills, abilities, and other characteristics (KSAOs) that workers must have to perform successfully in the position and those desired in the

KSAOs The knowledge, skills, abilities, and other characteristics that are necessary for a person to perform well in a job. Also referred to as job specifications, KSAOs are derived from job analysis

HR PLANNING NOTEBOOK 4.1

THE SKILLS NECESSARY FOR EFFECTIVE PLANNING

HR planning takes many forms, and uses a variety of methods. In many smaller organizations, planning is initi- ated in the business line, where the line manager looks to the short-term future to determine employee needs, and submits a request to HR for the expected number of new hires needed. The HR department aggregates the estimates across the organization and puts plans and practices in place to accommodate those needs. As firms grow and become more complex, so too does the plan- ning process, and the planning can become more long term in its focus.

When forecasting becomes a more involved process, a number of skills must be brought together to ensure that effective planning can take place. These skills do not need to be present in a single person, but must be available to forecasters either within the HR function, or on a cross- functional planning team. The following skills have been proposed as critical to the planning function:

1. Communication skills. Forecasting involves the entire business, not just a single functional area. Commu- nication skills are necessary to deal with multiple departments and stakeholders, and to ensure that the processes used (both quantitative and qualita- tive) have gathered as much information as possible.

2. Quantitative skills. As artificial intelligence and the types of algorithms used to develop forecasts become

more advanced, the need for quantitative skills to perform basic statistical analyses will likely decrease, but for now many forecasting methods rely on basic knowledge of statistical methods. Fortunately, there are a variety of statistical software packages avail- able today, and many tutorials, both in class and online to help users develop the skills to use the software.

3. Strategic skills. Forecasting is ultimately linked to the resources that are necessary to implement the firm’s strategy. HR planners must be able to connect business challenges and business requirements to human capital requirements in order to be successful. Understanding the actions and outcomes that drive success in the business is critical to the ability to forecast the human capital necessary to perform those actions.

4. Process management skills. This skill partners with communication skills to enable planners to arrive at a method or combination of methods that will provide a single, usable forecast. The information and the people necessary to arrive at a forecast often come from multiple functional departments within the orga- nization, and often need to coordinate with external consultants. Managing the forecasting process itself can be a sizable task.

Source: Lapide, L. (2003). “Organizing the forecasting department,” The Journal of Business Forecasting, 22(2), pp. 20–21.

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workforce of the future. This inherent comparison facilitates a proactive, sequential approach to developing internal workers and is concurrent with activities focused on obtaining the best external recruits from competitors, universities, and training programs.2 In this manner, organizations can reduce their HR costs as they take a long-run planning approach to HR issues. This means that organizations will be less likely to have to react in a costly last-minute crisis mode to unexpected devel- opments in the internal or external labour markets. Proper planning will ensure that any inefficiencies can be avoided as much as possible: consider an HR surplus situation in which an organization does not have enough work for all its employees but still has to continue to pay wages and benefits, or, alternatively, in which an organization faces an HR gap, where an increase in work demands cannot be met by the existing employment arrangements, and the organization will have to pay overtime to its current workers.

INCREASING ORGANIZATIONAL FLEXIBILITY An oft-cited advantage of HR forecasting is that its proactive process increases the number of viable policy options available to the organization, thereby enhancing flex- ibility.3 With regard to labour supply considerations, forecasting processes develop program options that can determine whether it is more advantageous and cost-effective to retrain or develop current members of the workforce to fill anticipated job openings or fill these openings with external recruits who already possess the required competencies and skills. Given that HR forecasting is predicated on trends, assumptions, scenarios, and various planning time horizons, the process itself encourages the development of a wide range of possible policy options and programs from which the HR staff can select. Furthermore, each of the various HR programming options are ranked, subjected to cost–benefit analyses, and allocated organizational resources after being carefully examined as part of the HR forecasting process.

Finally, by keeping the level of available human capital in step with opera- tional requirements, the organization minimizes any H R gaps or surpluses. An HR gap occurs when the organization has insufficient human capital to meet its operational needs; conversely, an HR surplus is when the organization has more human capital than needed. Where an HR gap will require more hiring or training, the firm would respond to an HR surplus generally through a hiring freeze, attri- tion, or even lay-offs. Maintaining alignment between the required levels of human capital and operational requirements gives the firm the human capital resources to earn greater revenues when it has the opportunity to do so, and also prevents the firm from having higher costs when revenues dip. When operating costs are able to vary with revenues, organizations have more operating leverage, which increases organizational performance.

ENSURING A CLOSE LINKAGE TO THE MACRO BUSINESS FORECASTING PROCESS A problem can develop in organizations when the HR planning process is not aligned to the overall business goals of the organization.4 The implementation of an HR forecasting

HR gap A shortage of human capital such that the organization is unable to meet its current or forecasted human capital requirements HR surplus A situation in which the organization has more human capital than it requires in order to meet its current or forecasted human capital requirements

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process helps to eliminate the possibility that HR policies will veer away from the overall operating and production policies of the organization. First, HR forecasting, although an ongoing process, takes its lead from specific production, market share, profitability, and operational objectives set by the organization’s top management (see HR Planning Today 4.1 for an example of how HR planning at Starbucks flows from the broader business strategy). These objectives have been established through proactive internal and environmental scans of market and competitor strengths, weaknesses, opportunities, threats, resources, and policy actions.5

Once these have been established, specific HR forecasting analyses are set in motion to determine the feasibility of the proposed operational objectives with respect to time, cost, resource allocation, and other criteria of program success. The HR analyses are subsequently sent back to top management, and they either confirm the viability of the original business objectives or indicate that changes (e.g., the alloca- tion of additional resources) need to be made to enable the objectives to be met. HR Planning Today 4.2 outlines the experiences of one corporation in aligning its corporate values with its HR processes.

The business forecasting process, therefore, establishes overall organizational objec- tives, which are input into the HR forecasting process.6 Management can then determine whether the explicit objectives, with their associated specific performance parameters, can be met with the organization’s current HR policies and programs or whether specific changes have to be instituted, with their associated costs, to achieve the objectives. These analyses and the subsequent feedback of the HR forecast summaries to senior manage- ment help to ensure that the top decision makers in the organization (1) are aware of key HR issues and constraints that might affect organizational plans for success and (2) ensure that the HR objectives are closely aligned with the organization’s operational business objectives.7

HR PLANNING TODAY 4.1

STRATEGIC PLANNING AT STARBUCKS

As competition in the specialty coffee industry heats up, Starbucks has modified its strategy in order to retain its competitive position. Some of the changes to Starbucks’ strategy include an increased focus on sourcing coffee beans ethically, on caring for the environment in its business practices, and on community involvement. For Starbucks, community involvement means taking a more active role in the well-being of the communities in which its stores operate. For example, Starbucks has committed to an effort to help youth, military veterans, and family of veterans to find meaningful career paths by pledging to hire 25 000 veterans and military family

members by 2025, and up to 100 000 young men and women not currently working or in school by 2020. Starbucks has also committed to building stores in low-to-medium income urban markets, and to building stores using local minority- and women-owned contrac- tors and vendors. These activities demonstrate how a company can put its values into action so that they are connected to strategy, and are clear for customers and employees to see and understand. By doing so, Starbucks is demonstrating how HR planning and fore- casting plays a crucial and strategic role in executing its social impact initiative.

Sources: Message from Howard Schultz to Starbucks partners: Living our values in uncertain times. January 29, 2017. Starbucks Newsroom, news.starbucks.com; and Valby, Karen. Starbucks is bringing hope—and profit—to the communities of America’s forgotten. July 31, 2017. Fastcompany.com.

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HR PLANNING TODAY 4.2

CUTTING-EDGE CANADIAN HRM: SAPIENT CANADA—ALIGNING CULTURE AND CORE VALUES WITH KEY HR PROCESSES

Sapient Corporation provides IT strategy and marketing design consulting services for clients worldwide based out of 22 offices in Canada, the United States, Europe, and India. Sapient Canada has 185 staff (and 47 temporary international “travellers”), and its synergistic HR processes and operations have helped ensure its consistent place- ment in “The Top 100 Employers in Canada.”

The company’s corporate core values of “openness, people growth, leadership, client focus, creativity and growth” are explicitly incorporated into the selection and succession processes, with the goal of finding qualified employees who best fit these values. Furthermore, Sapient Canada’s people-oriented culture is inclusive and minimizes hierarchical distinctions as exemplified by the “open table” office design, with only two offices (no cubicles) in the whole building, ensuring that all employees, including the man- aging director and top staff, sit at tables with the rest of the workforce.

Leadership development programs rely extensively upon formal mentoring for the top 20 potential employees, and informal mentoring and buddy systems for new and other ongoing employees. Feedback is both encouraged and expected, and all Sapient Canada employees receive mandatory semi-annual performance assessments, over and above the regular coaching and counselling activi- ties demonstrated on a day-to-day basis. These 360° PPG (people, performance, and growth) performance appraisals include a self-appraisal component, along with qualitative and quantitative assessments of performance provided by a variety of employee and manager-nominated external assessors. Managers are themselves evaluated on their effectiveness in developing their personnel, and there are very real financial and career consequences if they do not

perform the employee PPG review and other HR processes in a highly competent and timely fashion.

Leaving aside a compensation scheme that pays a premium over prevailing market rates for top-quality per- sonnel, other factors that enable successful retention of key performers include ample opportunities for further education and learning, organizational support for corporate social responsibility community improvement initiatives, and a comprehensive and integrated awards and recognition program. Approximately every six to eight weeks, Sapient Canada has a mandatory professional development day and social activity, during which time employees are instructed on topics such as work–life balance, developing business and career plans, and so on. Employees are seconded or given time away from billable projects in order to join in community improvement initiatives. A broad range of awards, from “Rookie of the Year” (for new hires) to the “Founders Awards,” promotes recognition of exemplary performance and demonstration of core values.

HR forecasting processes are based upon ongoing, real-time bottom-up and top-down forecasting processes. Bottom-up HR forecasting at Sapient Canada is derived from aggregating the labour demand forecasts of various business consulting projects and their requirements for various type of employee skills, knowledge, expertise, and qualifications. These business plan–driven forecasts are augmented by top-down HR forecasts predicated on strategic analysis of business and HR trends, leading to anticipatory hiring today of personnel with competencies and attributes that will be required by Sapient’s operations in future. This multi-tier HR forecasting process operates in real time with comprehensive evaluations conducted at least monthly by the HR staff.

Source: Kenneth McBey, Interview of Lou-Ann Paton, Amanda Peticca-Harris, and Brad Simms of Sapient Canada.

ENSURING THAT ORGANIZATIONAL REQUIREMENTS TAKE PRECEDENCE OVER ISSUES OF RESOURCE CONSTRAINT AND SCARCITY As we present each step of the HR forecasting process in sequence throughout this book, it will quickly become evident that the first step in the process is the calculation of organizational requirements, or demand for human resources. Determining the

Human resources demand The organization’s pro- jected requirement for human capital

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source of human capital—that is, the availability or supply of workers—is done only once the process of evaluating human capital requirements for current and future time horizons has been finalized. This sequence is not accidental, and it reinforces the fact that attainment of desired organizational goals and objectives must take priority over all issues concerning resource scarcity and other implementation issues.

// THE VALUE OF HUMAN CAPITAL TO THE FIRM Human capital theory suggests that it takes time for investments in human capital to produce financial or productivity-based returns to the firm. The reason for this is that human capital generally comes to the firm in the form of generic human capital, which over time develops into firm-specific human capital.

GENERIC HUMAN CAPITAL Generic human capital represents the knowledge, skills, and abilities that are held by employees and that are useful to the firm. It is called generic human capital because these types of skills are of equal value to most any company, and so this value can be priced in the labour market. For example, most firms benefit from the skills of a chartered accountant, and because these skills are of equal value across almost any company, a chartered accountant is able to price that value, and to require payment for those skills at their full value. The ability to determine a market cost for labour limits the amount of value that the firm can acquire from these skills, since the value that is captured for the firm through the deployment of that human capital flows almost completely to the employee. Firm-specific human capital, on the other hand, represents the kind of knowledge that employees have that benefits the firm, and that requires a deep under- standing of the firm’s systems, social structure, or customers.

FIRM-SPECIFIC HUMAN CAPITAL Firm-specific human capital represents the skills that employees have based on their tacit knowledge and learned from experience in the firm and through mentorship. An example of firm-specific human capital could be using one’s knowledge of the processes and people involved in making a change to a data entry screen to cut the time required to implement the change from one week to one day. Because firm-specific human capital is valuable to the firm, but cannot be easily transferred across organizations, it is very difficult for the employee to determine this value in the labour market. Consequently, the firm is able to retain much of the value of firm-specific human capital, which represents a potential source of competitive advantage from human capital.

HUMAN CAPITAL STOCK AND FLOWS Because it takes time for generic human capital to develop into firm-specific human capital, forecasting must take into account not just the stock of human capital, but also its flow. Human capital stock refers to the amount of human capital within the firm at any given

Human resources supply The source of human capital to meet demand requirements, obtained either internally (current members of the orga- nization’s workforce) or from external agencies

Generic human capital The competencies, knowledge, skills, and abilities that are held by individual employees and that are useful to the firm

Firm-specific human capital The competencies, knowledge, skills, and abilities that employees possess based on their tacit knowledge, and learned from experience and through mentorship in the organization Human capital stock The amount of any specific form of human capital that is available to the firm at any given time

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NEL 87CHAPTER 4 The HR Forecasting Process

time, whereas human capital flow represents how human capital stock changes over time.8 Forecasting human capital requires that planners consider not just how many employees may be required at a given time (i.e., the stock of human capital), but also whether the requisite level of firm-specific human capital will be available for the firm to compete (i.e., the flow of human capital). Some management scholars suggest that the current skills gap in North America is largely attributable to the fact that companies have been ignoring the flow of human capital within their firms.9 HR Planning Today 4.3 discusses an emerging method that organizations are using to deal with skills gaps relating to highly skilled or technical human capital requirements.

The consideration of stock and flows will depend on the type of human capital required. For example, firms that focus on generic human capital through the use of seasonal or part-time jobs that require few specialized skills and little training may place more emphasis on the importance of stocks; whereas firms that focus on firm-specific human capital through the use of jobs that deal with integrating processes or complex social networks will need to focus on human capital flows. Forecasting tools that assess human capital requirements based on historical measures such as sales levels are inher- ently more focused on human capital stocks. Forecasting tools that are dependent on succession management, and that integrate turnover rates and employee movement such as promotions, including Markov analysis, are more focused on human capital flows. We will discuss these forecasting tools in more detail in chapters 5, 6, and 7.

Human capital flow The change in the stock of human capital over time. Factors that affect the flow of human capital include terminations, promo- tions, lateral move- ments, and demotions

HR PLANNING TODAY 4.3

FORECASTING JOB REQUIREMENTS VERSUS TASK REQUIREMENTS

Current methods of planning in HR are based on the job; planners consider how many workers or worker hours may be required to produce a given level of output, and an appropriate level of hiring is performed to fill jobs to accommodate the expected level. However, organizations are beginning to move away from the job to examine how to align human capital with specific tasks, even if it means outsourcing a small part of a job, or a few tasks from a range of jobs. The implication is that using the job as the unit of analysis for human capital require- ments might be becoming redundant. Crowdsourcing and human capital portals are now available to provide organizations with access to highly skilled workers to help solve particular human capital challenges. Talent platforms such as TopCoder, Tongal, Appirio, Upwork, and InnoCentive now connect organizations with free- lance workers who bid to take on specific tasks, or work collaboratively to solve particular problems. These

organizations help firms gain access to content creators, web or app developers, data scientists, and communities of problem solvers in order to create advertisements or to solve difficult problems. Rather than creating a particular job with a given set of tasks, organizations can now look at strategic issues in terms of the actions required to solve those challenges, and gain access to some of the best talent in the world to perform many of those actions through talent platforms.

As organizations move away from full-time employ- ment, planners must also begin to think less in terms of the types and numbers of jobs that are required to fulfil organizational needs to the kinds of skills or competencies that are required to fulfil strategic organizational chal- lenges. This will require planners to have a firm under- standing of how to implement strategy in terms of actions and the skills necessary to perform those actions, and how to access those skills in innovative ways.

Source: Adapted from Boudreau, J. “Improving ‘Crowdsourced’ Creativity”. September 25, 2015, linkedin.com; and Boudreau, J. Jesuthasan, R. & Creelman, D. 2015. Lead the Work: Navigating a World Beyond Employment. Wiley and Sons: Hoboken, NJ.

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Strategic Human Resources Planning NEL88

// KEY HUMAN CAPITAL ANALYSES CONDUCTED BY HR FORECASTERS STRATEGIC FORECASTING Any human capital forecasting exercise should begin with a business problem. That is, human capital needs flow from strategic business challenges, and so the question of human capital needs is derived from asking how human capital can be used to solve a business problem. For example, Walmart is seeking to maintain its leadership posi- tion in the retail sector amidst the huge transition from in-store to on-line shopping. One potential solution to keeping costs low while shipping goods to customers is to show customers what sorts of items will ship easily with and at the same time as their other purchases. The idea is to streamline costs by helping customers to find and buy a larger basket of items that will save money and time.10 This business challenge at Walmart around increasing sales falls directly in line with its strategy as a large-scale retailer, but it does not involve the types of human capital traditionally expected to be involved in increasing retail sales. The types of human capital requirements involved in solving this business challenge would be those relating to data interpre- tation, supply chain management, and logistics. When viewed from the perspective of business challenges, it is possible to develop a clear understanding of the types of human capital that can be considered strategic, and that should therefore be central to any planning efforts.

In addition to a focus on strategic human capital requirements, workforce planners must also bear in mind the kinds of human capital needs that flow from the strategy to the kinds of activities that are necessary to implement the strategy. To aid in this plan- ning, it can be useful to group required human capital requirements into categories. A few of these categories are discussed below.11

1. SPECIALIST/TECHNICAL/PROFESSIONAL WORKERS

Workers holding trade qualifications that are in high demand or that require lengthy preparatory training for attainment of skill competency constitute a key area of focus for HR forecasting. The news media frequently run stories about business owners who are unable to fill positions because they cannot find the requisite skills in the appli- cant pool. Avoiding the supply constraints that arise from skills gaps can be difficult, especially in specialized skills areas, and so organizations should identify jobs with specialized skill requirements, and have programs in place to ensure that this strategic human capital is available when needed. Planning for skills shortages among specialized jobs can be very challenging. For example, when the Sarbanes-Oxley Act was instituted in the United States in 2002 as a response to the corporate scandals of the previous few years, it caught the financial industry by surprise. In order to comply with the Act, financial institutions that were listed on a U.S. stock exchange were required to demonstrate a higher level of transparency and managerial responsibility. This created a large increase in the need for accountants with specialized training in internal auditing, and an immediate skills gap developed. The shortage of accountants with a specialty in audit led to a sharp increase in compensation for this job. Because it requires up to three years to become specialized as an accountant in audit, the skills gap persisted for a few years until the labour market could respond to the gap, at which time the

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NEL 89CHAPTER 4 The HR Forecasting Process

premium prices being paid in the market for internal audit accountants evaporated, and compensation levels fell back to a level consistent with similar accounting jobs.

2. EMPLOYMENT EQUITY– DESIGNATED GROUP MEMBERSHIP

Organizations might have strategic reasons for seeking out members of an underrepre- sented part of their community. Federal and provincial governments in Canada have enacted employment-equity legislation and guidelines that require organizations to ensure employment practices are fair and equitable and that the composition of their workforce reflects the rapidly changing face of Canadian society. Four designated groups require spe- cial attention with respect to their degree of use or equitable employment in organizations:

1. People of Aboriginal descent 2. Women 3. Persons with disabilities 4. Members of visible minorities

Particular attention must be paid to monitoring members of these designated groups with respect to organizational opportunities.12 Furthermore, the composition of the organizational workforce should reflect the underlying characteristics of the society in which it is embedded, so the supply issue, as it relates to proportional representation of designated groups in the organization, is a key area for HR forecasting. As organiza- tions become more conscious of promoting particular values as part of their brand, and as Canadian society becomes more diverse, forecasting the demand for and supply of underrepresented groups is becoming an increasingly important activity.

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Designated groups represent an underutilized source of labour.

Designated groups Groups deemed to require special atten- tion due to the per- sistent disadvantages they face in the labour market; the four des- ignated groups include people of Aboriginal descent, women, per- sons with disabilities, and members of visible minorities

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Strategic Human Resources Planning NEL90

3. MANAGERS AND EXECUTIVES

Executives (CEO, president, vice-presidents, and so on) interact with key environmental stakeholder groups on behalf of the organization and are responsible for setting the goals for the organization’s future direction. Managers are responsible for coaching, directing, training and developing, and empowering worker behaviours to achieve the goals established by the executive group. Although there is no shortage of managers and executives who can function effectively in relatively benign, predictable, envi- ronmental situations, researchers believe that organizational leaders who are able to transform organizational culture and anticipate external change, and who possess the personal attributes necessary to unify the organization, are very rare in most public- and private-sector organizational settings.13 For this reason, greater attention must be paid to identifying leadership talent within the organization. The organization’s survival and future success depend directly on succession and replacement planning. Succession management is discussed more thoroughly in Chapter 7.

4. RECRUITS

New entrants can bring insights into how competitors structure and operate their busi- nesses and may, as well, bring with them the latest trends and practices taught in universities and specialist training agencies. The relative balance of internal to external human capital supply is a key factor in the HR forecasting process.

// THE FORECASTING PROCESS The forecasting process is dependent on many factors, including features that are internal to the organization, and external factors that influence the firm. However, the forecasting process in general can be described as following a basic pattern that flows from a macro perspective to a micro perspective. The macro perspective takes into account general trends in society and the economy (see HR Planning Notebook 4.2 for a discussion of planning at the macro level), whereas the micro level focuses more directly on chal- lenges that are specific to the organization. The planning process often moves from the macro level to the micro level in the following manner as general organizational needs become specific departmental requirements:14

1. Determine the staffing needs by skills, skill levels, or jobs. This macro-level activity begins with a thorough understanding of the organization’s strategy and environmental scanning in order to determine the relevant pieces of information and types of analyses that are most suited to what is being forecast.

2. Perform the analyses to determine the number of required employees. This involves an assessment of in-house skills and other internal supply charac- teristics as well as determining the demand requirement that must be met from external sources. The type of analysis can be qualitative or quantitative, and the focus of the analysis can range from simple headcounts to strategic scenario planning. Methods of forecasting the demand for and supply of human capital will be discussed in chapters 5, 6, and 7.

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NEL 91CHAPTER 4 The HR Forecasting Process

3. Create a budget to determine the costs involved in fulfilling the stated organizational requirements.

4. Put HR programs and policies into place to ensure that the demand and supply requirements are met, and track the results. Measures of production, efficiency, employee performance, or group performance may be used to assess the results of the forecasting process.15

FORECASTING METHODS Whether forecasting the requirement for human capital (i.e., demand forecasting), or the source of that human capital (i.e., supply forecasting), a variety of methods are available to perform the forecast. Research suggests that firms tend to go through a cyclical process of gravitating toward more complex forecasting technologies, then back to simpler ones, and then increasingly complex methods again until a balance is formed.16 The decision to use more complex forecasting methods is predicated on

Demand forecasting The process of determining the orga- nization’s requirement for specific forms of human capital Supply forecasting The process of determining the source or sources of human capital to satisfy the organization’s demand

HR PLANNING NOTEBOOK 4.2

HUMAN CAPITAL FORECASTING AT THE MACRO LEVEL

The Canadian Federal Government regularly updates its human capital forecasting through the Canadian Occupa- tional Projection System (COPS). These efforts are partly used to guide policy around training, skills development, and education funding in Canada. The forecasting process begins with estimates of the demand for labour by industry and job type, and also gathers the sources of supply for the same types of human capital. The analysis then seeks to determine the areas of imbalance between the demand for human capital and its supply. The ultimate objective is to identify jobs where potential labour market imbalances are expected to occur over the next decade. Some of the mea- sures that COPS uses to perform its forecasting include

• Job vacancy rate. This measure provides an estimate of the level of unoccupied positions and is calculated as the number of vacant positions divided by the total labour demand for a job.

• Job openings by skill level. This category divides job into skill levels ranging between management, university education, college education, high skill, and on-the-job training.

• Employment growth projections by industry.

The COPS system takes job information from the National Occupation Classification, and assesses labour market conditions using unemployment rate, wages, and employment as its primary sources of data to forecast the demand for human capital. To assess the supply of human capital, COPS uses estimates of the projected number of job openings (from projections of employment growth) and new job seekers (that is, students leaving the school system, and new immigrants) over the next decade, as well as the replacement of workers due to retirements, deaths, and emigration.

Between 2015 and 2024, the COPS system projects that 17 occupations will show signs of labour shortage, mostly coming from areas that require postsecondary edu- cation or apprenticeship, and many coming from areas relating to health, skilled trades, and applied sciences. COPS projects 18 occupations to show signs of labour surplus, coming from areas that require a high-school diploma, or on-the-job training, and that are primarily in sales and service occupations.

Sources: Government of Canada: Canadian Occupational Projection System, http://occupations.esdc.gc.ca/sppc-cops/[email protected], retrieved March 2, 2018; and Government of Canada: National Occupation Classification, http://noc.esdc.gc.ca/English/home.aspx, retrieved March 2, 2018.

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Strategic Human Resources Planning NEL92

the availability and quality of data. Given the increase in enterprise resource planning systems and HR information systems to capture organizational data, more complex methods of forecasting have become increasingly available. The advent of artificial intelligence to assist in sorting through large amounts of data will undoubtedly have future consequences on the methods of forecasting that will be used in the next decade. For now, popular methods of forecasting fall into the following categories:

1. Survey the business line for their anticipated needs. This method includes subjec- tive decisions such as personal rules of thumb (e.g., a line manager may have a seasonal forecast rule of thumb that sales staff requirements double in the summer months).

2. Norm-based rules. This is a very common method of forecasting in which existing assumptions based on historical data are used to create ratios of production or sales amounts to human capital needs. This category includes trend analysis, which will be discussed more in Chapter 5.

3. Time series– and regression-based models. These types of models are largely based on objective data such as sales levels, marketing efforts, and seasonality or historical demand, and are able to incorporate more information than norm- based rules in determining the forecast.

4. Mathematical and econometric models. While these types of models can be relatively simple and straightforward, they can also become quite complex (see HR Planning Notebook 4.3 for more discussion around the use of simple versus

HR PLANNING NOTEBOOK 4.3

ARE COMPLEX FORECASTING MODELS BETTER THAN SIMPLE ONES?

Complex forecasting models are based on the availability of large amounts of data, and use sophisticated model- ling techniques such as mathematical and econometric models. Less technologically sophisticated models, on the other hand, are based on qualitative methods, or norm- based rules. While the use of complex models is mostly limited to large organizations that possess both the data and the expertise to develop such models, does this mean that smaller organizations are missing out on the best planning methods, or that larger organizations should limit their forecasting methods to complex models? According to the research, both types of models have their place in the forecasting repertoire.

Complex models tend to be used most when the envi- ronment can be characterized as fairly low in uncertainty. In highly uncertain environments, less sophisticated and more qualitative models are more frequently put to use. Uncertain environments are those that are perceived to be

more complex in terms of greater variety in the types of labour involved, the presence of more government regula- tions, or the complexity of relationships with customers and suppliers. Uncertain environments are also perceived to be more dynamic (less stable) in terms of the speed at which relevant environmental factors change over time. The many environmental changes that have impacted the way Netflix delivers its value proposition of providing easy access to quality programming to its customers over the past 20 years is an example of a dynamic environment.

When deciding on the type of forecasting model to use, planners should gauge their decision on the extent to which the environment is complex versus simple, and dynamic versus stable. Environments that tend toward simplicity and stability lend themselves well to complex forecasting models. Environments that tend to be more dynamic and complex lend themselves well to less sophis- ticated and more qualitative forecasting methods.

Source: Adapted from Stone, T., & Fiorito, J. (1986). “A perceived uncertainty model of human resource forecasting technique use.” Academy of Management Review, 11(3), pp. 635–642.

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NEL 93CHAPTER 4 The HR Forecasting Process

complex forecasting models). Examples of models in this category include Markov models, simulations, and structural equation modelling. These models are highly data driven, and can incorporate a large number of assumptions and variables. This allows for very sophisticated modelling, but requires a relatively high degree of expertise in constructing the analysis, and is dependent on the quality of the data that are used in the model. A primary benefit of artificial intelligence such as IBM’s Watson is that complex models such as these will eventually become easier to construct so that little or no specialized mathemat- ical or statistical knowledge will be necessary to perform these types of analyses.

5. Qualitative models. This category of models is based on human judgment, and includes methods such as the Delphi Technique, focus groups, Nominal Group Technique, and scenario planning. A primary benefit to qualitative models is that human judgment may be best suited when a high degree of uncertainty exists or if the data or expertise is not available to construct a quantitative model. For example, the automobile industry and its movement toward electric- powered vehicles and autonomous vehicles carries many questions around how automobile manufacturers should focus their human capital. Should research and design resources be moved away from gasoline and diesel-powered vehicles and toward these newer technologies and, if so, how much should be invested in these newer technologies? These decisions are based on many factors such as management preferences, consumer demand, government involvement in building new infrastructure to accommodate new technology, and broader eco- nomic trends. Such decisions are probably best made using qualitative methods.

The analysis of these types of models will be discussed in more detail in chapters 5 and 6. HR Planning Notebook 4.4 discusses how these forecasting model types fall into three basic categories of analysis.

HR PLANNING NOTEBOOK 4.4

CATEGORIZING FORECASTING MODELS

Forecasting models like the general types discussed ear- lier in this chapter can be categorized into three types of analytical models: (1) time-series models, (2) cause-and- effect models, and (3) judgmental models. Time-series models use historical data in order to extrapolate and extend trends into the future. These models can be simple to use and are typically confined to short-term forecasting. An example of a time-series model is trend forecasting. Cause-and-effect models assume that an ongoing rela- tionship exists between one or more causal or “inde- pendent” variables that produce change in the target or “dependent” variable. An example is the significant nega- tive relationship existing between market rate of interest

(cost of capital) and the demand for construction workers. Cause-and-effect models are used for short-, medium-, and long-term HR forecasting; forecasting models such as regression, and other mathematical and econometric models are forms of cause-and-effect models. Finally, judgmental models are used for new ventures, situations in which past data do not exist or are unreliable, in situ- ations that are highly novel or that involve a great deal of uncertainty, or when the forecasting period extends into the distant future. They rely on the subjective judgments of experts to derive the forecasts, and include basic survey and norm-based models to more structured models such as the Delphi technique.

Source: Adapted from Jain, C. 2002. “Benchmarking Forecasting Models,” The Journal of Business Forecasting Methods and Systems, Vol. 21, No. 3 (Fall), pp. 18–20.

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Strategic Human Resources Planning NEL94

Having discussed the basic forecasting process, we now examine the effects of environmental uncertainty and of planning time horizons on HR forecasting.

// ENVIRONMENTAL AND ORGANIZATIONAL FACTORS AFFECTING HR FORECASTING HR FORECASTING TIME HORIZONS As environmental and organizational factors increase the level of uncertainty for HR forecasters, flexibility in the programs they devise to balance human capital demand and supply is necessary. The key point to consider from an analysis of environmental and organizational factors is that uncertainty decreases confidence in the ability to predict the future accurately and hence reduces the HR forecasting time horizon.17 Although there are variations among organizations with respect to how they define their specific time parameters, the typical HR forecasting time horizons are as follows:18

1. Current forecast: The current forecast is the one being used to meet the immediate operational needs of the organization. The associated time frame is up to the end of the current operating cycle, or a maximum of one year into the future.

2. Short-run forecast: The short-run forecast extends forward from the current forecast and states the HR requirements for the next one- to two-year period beyond the current operational requirements.

3. Medium-run forecast: Most organizations define the medium-run forecast as the one that identifies requirements for two to five years into the future.

4. Long-run forecast: Due to uncertainty and the significant number and types of changes that can affect the organization’s operations, the long-run forecast is by necessity extremely flexible and is a statement of probable requirements given a set of current assumptions. The typical long-run forecast extends five or more years ahead of the current operational period.19

The outcome of forecasts derived from these four time horizons leads to predic- tions and projections. A prediction is a single numerical estimate of HR requirements associated with a specific time horizon and set of assumptions, whereas a projection incorporates several HR estimates based on a variety of assumptions.20 The variance of the predictions around the average prediction forms an envelope within which the current set of assumptions are likely to be valid. In other words, an envelope describes the range of plausible forecast values for an existing set of assumptions. Figure 4.1 illustrates an envelope around the forecast of the number of employees required to build engines in a manufacturing facility, where the blue line represents the average of all predictions, and the shadowed band immediately above and below the line indicates the values within which most predictions fall. A common envelope range is 95 percent, which means that the shadowed band includes 95 percent of all expected values. An interpretation of Figure 4.1 could be that when the facility needs to produce 100 engines, it will likely require somewhere between 45 and 53 employees (the points at which the lower and upper sections of the shadowed band would meet the y-axis), given the current set of assumptions. The use of a combination of predictions and projections provides the necessary forecasting flexibility required to cope with the uncertainty and change associated with the environmental and organizational factors described previously.

Prediction A single numerical estimate of HR require- ments associated with a specific time horizon and set of assumptions Projection Several HR estimates based on a variety of assumptions Envelope The range of plausible values of a prediction based on a given set of assumptions

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NEL 95CHAPTER 4 The HR Forecasting Process

When changes occur that fall outside the set of assumptions that led to a particular forecast, the current prediction envelope cannot be relied upon. HR forecasters therefore devise a set of alternative scenarios, each with its own set of assumptions and program details associated with HR functions such as training and development, staffing (adver- tisement, recruiting, and selection), and succession or replacement planning.21 Naturally, organizations must also conduct contingency planning to have HR policy responses ready if substantive unanticipated changes occur. Contingency plans are brought into action when such severe changes to organizational or environmental factors completely negate the usefulness of the existing HR forecasting predictions or projections (e.g., a substantial drop in consumer demand occurs due to adverse public relations, as was seen in the Classic Coke and Tylenol cases).

Scenarios Proposed sequence of events with their own set of assumptions and associated program details Contingency plans Plans to be imple- mented when severe, unanticipated changes to organizational or environmental factors completely negate the usefulness of the existing HR fore- casting predictions or projections

Average and envelope of employees required for engine production

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PROJECTED AVERAGE AND ENVELOPE OF EMPLOYEES REQUIRED FOR ENGINE PRODUCTION

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Strategic Human Resources Planning NEL96

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Some groups, like tradespeople, are in high demand.

HR PLANNING TODAY 4.4

PLANNING IN THE HEALTH SECTOR

Many experts agree that demands for workers in the health care sector will increase and there are not enough workers to fill these positions. Fraser Health, based in British Columbia, with 22 000 employees providing mental health care, and community and home care to a population of 1.6 million people, started noticing this skill shortage years ago, when key positions went unfilled. For example, although there were only 250 nursing positions unfilled, Fraser Health forecast that within five years, it would need over 2000 nurses. The organization identified several key factors that affected the demand for and supply of health sector workers.

Research showed that the population served by Fraser Health would increase by nearly 10 percent and that the proportion of people over the age of 65 would increase by 20 percent. Analyses revealed that Fraser Health was experiencing very high turnover of its younger generation. Furthermore, about two-thirds of its worker force were baby boomers, and therefore this organization could predict large losses of workers due to retirements and disability leaves. Among occupational groups, nurses

tended to leave positions in emergency and intensive care for jobs where less physical work and no graveyard shifts were required.

Based on these forecasts, Fraser Health created a larger recruitment department, and expanded recruit- ment efforts to the United Kingdom, New Zealand, and Australia. The organization also trained recruiters in current recruitment methods using Facebook, data mining, and online advertising. The HRIS system was upgraded to process applications more efficiently. Man- agers also looked at retention and established new programs, such as employee recognition and awards, to encourage commitment to the organization. To reduce absences due to on-the-job injuries, they installed new equipment. The organization worked with governments to increase the supply of health care workers by adding nearly 600 new places in educational programs for pharmacists, nurses, and occupational therapists. This effort to forecast using both macro and micro per- spectives has now spread to several other hospitals in British Columbia.

Sources: Soberg, A., and Bennington, A. “Workforce Planning: Implications for Health Care in Canada and Elsewhere,” People and Strategy, 32, 3, 2009, 26–32; and http://www.fraserhealth.ca/about_us/quick-facts, retrieved November 2, 2014.

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RECONCILING NET HR REQUIREMENTS The next two chapters deal with ascer- taining HR demand requirements and HR supply. Once the demand for human capital has been forecast, it is compared to the forecast of the required supply of human capital. A gap, or shortfall, in the supply of human capital must be addressed either through internal movement of human capital, external hiring, or a combination of both activities. A sur- plus in the supply of human capital can be addressed through a number of HR policies. HR Planning Today 4.4 portrays one organization in British Columbia that used a variety of methods to increase its supply of external and internal candidates.

INSTITUTE HR PROGRAMS AND POLICIES The net HR requirement is the gap or surplus that results from the forecasting exercise. As mentioned earlier in this chapter, an HR gap (shortage) can be addressed through recruitment efforts, retention efforts, or an increase in temporary or contract workers. An HR surplus is a condition in which the organization needs to shed human capital. Rather than instituting layoffs or down- sizing to deal with an HR surplus, the HR function should first consider less damaging methods whenever possible. These methods include job sharing, redeploying human capital to other areas of the firm, or a hiring freeze, where the process of attrition through voluntary terminations, or a combination of these policies is used to achieve the necessary reduction in the size of the workforce.

Job sharing When two or more employees perform the duties of one full-time position, each sharing the work activities on a part-time basis Attrition The process of reducing an HR surplus by allowing the size of the workforce to decline naturally from the normal pattern of losses associated with retirements, deaths, and voluntary turnover

Some companies respond to a labour surplus by reducing shift work.

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// SUMMARY This chapter has introduced the process of HR forecasting, and discussed its strategic importance to the firm. The advantages of instituting effective forecasting procedures include reducing the costs of HR, increasing the flexibility of the organization, ensuring a close link to the process of business forecasting, and ensuring that the requirements of the organization take precedence over other specific issues. HR Planning Notebook 4.5 provides more summary discussion around how organizations may fine-tune their HR forecasting models.

NEL 97CHAPTER 4 The HR Forecasting Process

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98 NELStrategic Human Resources Planning

The transfer of human capital from generic to firm-specific human capital shows how employees can be a source of competitive advantage to the firm. It is important to incorporate the development of firm-specific human capital into HR planning, and forecasting is the point where this planning begins. The concept of human capital stocks and flows was introduced in order to demonstrate that forecasting methods must incor- porate models that assess not just how much human capital is required, but how human capital moves into and out of jobs. Some job groups—executives or specialist/technical employee groups, especially those with hot and critical skills, for example—attract special attention in the HR demand and supply reconciliation process.

The general forecasting process was introduced, along with the categories of fore- casting methods, and the factors that impact forecasts. These concepts will be discussed in more detail in chapters 5 and 6. Finally, we discussed the policy implications of reconciling HR demand and supply, ending up with either an HR shortage or an HR surplus, and the various programs that may be instituted by organizations to address these varying situations.

HR PLANNING NOTEBOOK 4.5

TIPS ON TUNING UP YOUR HR FORECASTING MODELS

HR forecasting models attempt to align an organization’s human capital with strategic business direction by projecting future demand and supply requirements. By implementing a systematic process of analyzing current workforce and identifying talent gaps between desired present and future states, programs can be devised to attain these desired future states. However logical and straightforward this appears conceptually, there are a variety of compounding issues that can thwart the actual usage and comprehension of HR forecasting models in everyday life.

First, a key problem for HR forecasting is the dilemma between desiring simple, easy-to-use HR processes that are readily understood by a variety of organizational deci- sion makers and the reality that a multitude of individual, organizational, and environmental factors significantly impact human resources supply and demand. These vari- ables compete for consideration and incorporation into the modelling process. Remember the principle of parsimony, which dictates that additional causal factors should be incorporated into a forecasting model only if they make a significant marginal increase to prediction power.

Second, the issue of data collection time intervals should be considered when evaluating your HR forecasting model. Time lags in data collection lead to discrepancies between HR forecasts and actual requirements for human

capital. These discrepancies are less likely to occur if the collection frequency in a time-series analysis is increased. Australian researchers found that the utility of a model forecasting demand for emergency room employees increased when data collection was changed from monthly to daily or hourly observations.

Third, researchers investigating HR forecasting for the information security industry found that frequent feedback of relevant forecasting information helped reduce the prob- lems caused by time lags between separate forecasting of HR demand and HR supply models. Causal factors for HR demand were most strongly related to size and growth of the business sector and its operational capability, while key causal factors related to HR supply were demand for specific occupational training resulting from the perceived attractiveness of certain types of employment.

Finally, the whole concept of HR forecasting may seem daunting to many small enterprises, but successful HR forecasting models don’t have to be comprehensive or expensive, just systematic and sustained. Try segmenting jobs into three categories—strategic, core, and noncore— as a starting point for HR strategic planning. Ensure that analyses are both qualitative and quantitative in nature, and combine data from interviews from business leaders with data on worker performance and potential.

Sources: Adapted from R. Champion, L. Kinsman, et al., “Forecasting Emergency Department Presentations,” Australian Health Review, 31, 1 (February 2007); S. Park, S. Lee, et al., “A Dynamic Manpower Forecasting Model for the Information Security Industry,” Industrial Management & Data Systems, 108, 3 (2008), pp. 368–384; and C. Hirschman, “Putting Forecasting in Focus,” HR Magazine, 52, 3 (March 2007), pp. 44–50.

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99CHAPTER 4 The HR Forecasting Process NEL

KEY TERMS attrition p. 97 contingency plans p. 95 demand forecasting p. 91 designated groups p. 89 envelope p. 94 firm-specific human capital p. 86 generic human capital p. 86 HR forecasting p. 81 HR gap p. 83 HR surplus p. 83 human capital flow p. 87 human capital stock p. 86 human resources demand p. 85 human resources supply p. 86 job sharing p. 97 KSAOs p. 82 prediction p. 94 projection p. 94 scenarios p. 95 supply forecasting p. 91

DISCUSSION QUESTIONS 1. If you are reading this discussion question, you are probably taking a course at a

university or community college. In groups, discuss some ways that you might be able to forecast the demand for, and supply of, business management professors. What sources would you use and why?

2. The chapter starts with a discussion of the labour supply/demand mismatch and suggests that the government needs to become more actively involved in influencing the supply of the types of workers that employers need. However, others suggest that employers need to develop programs to address shortages. What can an employer do to ensure that it has the skills sets that it needs?

3. List all the ways that an organization can deal with a surplus of employees. Discuss the advantages and limitations of each option.

EXERCISE Why is strategic HR planning important to organizations? Describe the potential negative outcomes if (1) a hospital does not have enough nurses, (2) a university does not have enough professors, (3) Best Buy does not have enough salespersons in stores.

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CASE STUDY FORECASTING FOR HOME SUPPORT WORKERS

This case outlines the efforts of one Canadian planning agency to predict the demand for and supply of home care workers. Home support workers (HSWs) are those caregivers who provide personal care, and do light housekeeping and meal preparation for people in their home who are no longer able to do so themselves. Approximately 1.2 million people in Canada employ home care workers, and the demand for these workers will grow. Let us look at the factors that influence the demand for this occupational group.

The most important factor is that the majority of those needing HSWs are over 65 years of age, and this group is one of the fastest growing demographics in Canada. Another factor is cultural: more and more elderly people wish to remain in their own homes. Health care policy agrees with this “aging in place” philosophy, mainly because it is cheaper to keep people in their residence than to place them in an institution. Demand for HSWs is also increasing because of changes in family structures. Children (mainly daughters) used to provide the services needed for an aging parent. However, most women now work outside the home. People are also having fewer children and these children are likely to have jobs in different cities than the one in which they were raised. Because of these factors, demand for HSWs is expected to double over the next 30 years.

What about the supply of HSWs? There are many factors that influence people to choose to become a HSW. One motivation is the opportunity to serve in a meaningful way, to make a difference in a person’s life. However, there are many reasons that people choose not to become HSWs or choose to leave the profession. The compensation is low and not at parity with the same type of worker employed in a hospital, for example. Benefits also tend not to be equal. Working conditions are often difficult, with workers being subjected to aggressive clients (with mental deterioration), occupational injuries related to heavy lifting, and unsafe conditions in the home (pets, smoking, and lack of cleanliness). Also many of the caregivers are of a different race than their clients, and they report experiencing harassment, racism, and discrimination. These factors influence the attraction and retention of HSWs.

Sources: Keefe, J.M., Knight, L., Martin-Matthews, A., and Legare, J. 2011, “Key issues in human resource planning for home support workers in Canada,” Work, 40, 2011, pp. 21–28; http://www.cdn- homecare.ca/media.php?mid=2798, retrieved October 29, 2014; and http://www.cdnhomecare.ca/media .php?mid=2799, retrieved October 29, 2014.

QUESTION List all the reasons that demand for healthcare workers will increase, and the rea- sons that supply will decrease. What can governments do to increase the supply? What can employers do?

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// REFERENCES 1. Pynes, J. 2004. “The Implementation of Workforce and Succession Planning

in the Public Sector.” Public Personnel Management, Vol. 33, No. 4: 389–404; Stone, T., and J. Fiorito. 1986. “A Perceived Uncertainty Model of Human Resource Forecasting Technique Use.” Academy of Management Review, Vol. 11, No. 3: 635–642; Meehan, R., and B.S. Ahmed. 1990. “Forecasting Human Resources Requirements: A Demand Model.” Human Resource Planning, Vol. 13, No. 4: 297–307.

2. Schramm, J. 2005. “Planning Ahead.” HR Magazine, Vol. 50, No. 10: 152–153; Bechet, T. 2000. “Developing Staffing Strategies That Work: Implementing Pragmatic, Nontraditional Approaches.” Public Personnel Management, Vol. 29, No. 4: 465–478; Walker, J.W. 1980. Human Resource Planning. New York: McGraw-Hill.

3. Wagner, R., S. Hlavacka, and L. Bacharova. 2000. “Slovakia’s Health System: Hospital Human Resource Planning in Slovakia.” Journal of Management in Medicine, Vol. 14, No. 5: 6, 383–407; Beck, B.M. 1991. “Forecasting Envi- ronmental Change.” Journal of Forecasting, Vol. 10, No. 1: 3–19; Schuler, R.S. 1989. “Scanning the Environment: Planning for Human Resource Manage- ment and Organizational Change.” Human Resource Planning, Vol. 12, No. 4.

4. Bechet, T. 2000. “Developing Staffing Strategies That Work: Implementing Pragmatic, Nontraditional Approaches.” Public Personnel Management, Vol. 29, No. 4: 465–478; Fulmer, W. 1990. “Human Resource Management: The Right Hand of Strategy Implementation.” Human Resource Planning, Vol. 12, No. 4: 1–11.

5. Helton, K., and J. Soubik. 2004. “Case Study: Pennsylvania’s Changing Workforce: Planning Today with Tomorrow’s Vision.” Public Personnel Management, Vol. 33, No. 4: 459–474; McEnery, J., and M. Lifter. 1987. “Demands for Change: Interfacing Environmental Pressures and the Per- sonnel Process.” Public Personnel Management, Vol. 16, No. 1 (Spring): 61–87.

6. Fulmer, W. 1990. “Human Resource Management: The Right Hand of Strategy Implementation.” Human Resource Planning, Vol. 12, No. 4: 1–11.

7. Schuler, R.S., and J.W. Walker. 1990. “Human Resources Strategy: Focusing on Issues and Actions.” Organizational Dynamics, Summer: 4–19.

8. Ployhart, R., J. Weekley, and J. Ramsey. 2009. “The Consequences of Human Resource Stocks and Flows: A Longitudinal Examination of Unit Service and Unit Effectiveness.” Academy of Management Journal, Vol. 52, No. 5: 996–1015.

9. Cappelli, P. 2009. “A Supply Chain Approach to Workforce Planning.” Organizational Dynamics, Vol. 38, No. 1: 8–15.

10. Perez, S. 2017. “Walmart Launches Free, Two-Day Shipping Without a Mem- bership on Purchases of $35 or More.” Techcrunch.com. Retrieved January 30, 2017; Gagliordi, N. 2016. “Walmart Says ‘Basket Economics’ Strategy from Jet Acquisition Will Fuel Online Growth.” zdnet.com. Retrieved October 16, 2016.

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11. Adapted from Burack, E.J., and N.J. Mathys. 1996. Human Resource Planning: A Pragmatic Approach to Manpower Staffing and Development (3rd ed.). Northbrook, IL: Brace Park.

12. Grabosky, P., and D. Rosenbloom. 1975. “Racial and Ethnic Integration in the Federal Service.” Social Science Quarterly, Vol. 56, No. 1 (June): 71–84.

13. Zaleznik, A. 1977. “Managers and Leaders: Are They Different?” Harvard Business Review, Vol. 55, No. 3 (May): 67–78.

14. Agrawal, R., S.K. Nanda, D. Rama Rao, and B. Rao. 2013. “Integrated Approach to Human Resource Forecasting: An Exercise in Agricultural Sector.” Agricultural Economics Research Review, Vol. 26, No. 2: 173–184.

15. Adapted from Randall S. Chuler, and James W. Walker. 1990. “Human Resources Strategy: Focusing on Issues and Actions.” Organizational Dynamics (Summer): 4–19 with permission from Elsevier.

16. Stone, T.H., and J. Fiorito. 1986. “A Perceived Uncertainty Model of Human Resource Forecasting Use.” Academy of Management Review, (11): 635–642.

17. Beck, B.M. 1991. “Forecasting Environmental Change.” Journal of Forecasting, Vol. 10, No. 1: 3–19; Butinsky, C.F., and O. Harari. 1983. “Models vs. Reality: An Analysis of 12 Human Resource Planning Systems.” Human Resource Planning, Vol. 6, No. 1: 11–20.

18. Adapted from Bechet, T.P., and J.W. Walker. 1993. “Aligning Staffing with Business Strategy.” Human Resource Planning, Vol. 16, No. 2: 1–16; Walker, J.W. 1980. Human Resource Planning. New York: McGraw-Hill.

19. Ibid. 20. Burack, E.J., and N.J. Mathys. 1996. Human Resource Planning: A Pragmatic

Approach to Manpower Staffing and Development (3rd ed.). Northbrook, IL: Brace Park.

21. Fink, A., B. Marr, A. Siebe, and J. Kuhle. 2005. “The Future Scorecard: Combining External and Internal Scenarios to Create Strategic Foresight.” Management Decision, Vol. 43, No. 3: 360–381; Millett, S., and S. Zelman. 2005. “Scenario Analysis and a Logic Model of Public Education in Ohio.” Strategy & Leadership, Vol. 33, No. 2: 33–41; Van Der Heihden, K. 2000. “Scenarios and Forecasting: Two Perspectives.” Technological Forecasting and Social Change, Vol. 65, No. 31: 36; Mason, D.H. 1994. “Scenario-based Planning: Decision Model for the Learning Organization.” Planning Review: March/April 1994: 6–11.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand the importance of demand forecasting in the HR planning process.

• Recognize the linkages between the HR plan, labour demand forecasting techniques, and the subsequent supply stage.

• Compare and contrast the advantages and disadvantages of various demand forecasting techniques, including quantitative, qualitative, and blended techniques.

DETERMINING HR DEMAND

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// FORECASTING DEMAND HR demand refers to the firm’s future need for human capital, the types of jobs, and the number of positions that must be filled for the firm to implement its strategy. The demand for human capital is determined by the strategic and operational requirements of the firm or business unit. This means that understanding the demand for talent begins with the firm’s strategy, and flows from the value-generating activities of the firm. A systems perspective (see Chapter 9 for more information about a systems view) suggests that in order to determine the demand for any job, it is first necessary to understand how that job fits into the needs of the organization, and how those job

Estimates of the demand for labour in Canada have become increasingly uncertain over the past few years, primarily due to conflicting forces affecting the economy. On one hand, as baby boomers retire, there has been the expectation of a large increase in the demand for labour. By the year 2030, when the youngest baby boomers are expected to reach the age of 65, it is expected that between 22 percent and 24 percent of Canadians will be 65 years of age or older. However, not all baby boomers are choosing to retire at age 65. In 1997 a 50-year-old Canadian worker was expected to work another 13 years; by 2008 a 50-year-old worker was expected to work for another 16 years. Clearly, Canadians are remaining in the workforce longer. This increased participation has been attributed to factors including longer life expectancy, better health in older age, lower savings levels, and higher educational attainment. While the number of Canadians approaching retirement age is increasing dramatically, the rate of retirement might be slowing the resulting expected increase in demand for labour.

On the other hand, recent forecasts of the expected impact of workforce automation has produced dramatic estimates of the expected reduction in workforce partici- pation due to automation. Some estimates of the impact of automation on the Canadian labour force suggest that almost 50 percent of Canadian jobs are at a high risk of being affected by automation in the next two decades. Other, more temperate estimates, suggest that the types of jobs in Canada that are at a high risk of automation account for less than 2 percent of employment. With the high degree of uncertainty around the future impact of

automation on the Canadian workforce, long-term fore- casting becomes much more difficult.

The other primary forces contributing to uncertainty around the future labour demand in Canada are the shifts to self-employment and the sharing economy. The sharing economy refers to the services that are brought together through modern technology to provide services like accommodations for guests in people’s homes (such as Airbnb), transportation services for riders using privately owned vehicles (such as Uber), restaurant and grocery delivery services (such as Skip the Dishes), and crowd- funding platforms (such as GoFundMe). These types of work arrangements can be difficult to assess in terms of labour participation, and the impact of these services over the long term is uncertain due to shifts in technology and government regulations.

The combination of these factors contribute to a level of uncertainty that is very difficult to forecast using tradi- tional quantitative modelling methods. Long-term forecasts in this type of environment will require more qualitative methods and simulations that permit exploring multiple scenarios.

Sources: Statistics Canada (2014-09-17). “Population projections: Canada, the provinces and territories, 2013 to 2063.”

http://www.statcan.gc.ca/daily-quotidien/140917/dq140917a-eng.htm;

Carriere, Y., & Galarneau, D. (2016-03-03). “How many years to retirement?” Statistics Canada. http://www.statcan.gc.ca/pub/

75-006-x/2012001/article/11750-eng.htm; and

Oschinski, M., & Wyonch, R. (March, 2017). “Future Shock? The impact of automation on Canada’s labour market.” C.D. Howe Institute

Commentary #472.

INCREASE IN UNCERTAINTY AROUND THE DEMAND FOR LABOUR IN CANADA

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requirements interact with other jobs within the firm. Therefore, the demand ques- tion ultimately begins with a clear understanding of how the firm brings value to the customer, and an estimate of the extent to which the market will want to consume the firm’s products or services.

For example, as auto companies like Ford, GM, BMW, and Mercedes bring electric vehicles to the market, they might ask themselves what proportion of their total auto sales will be expected to come from electric vehicles over the next 10 years. The answer to such a question will certainly impact the technologies in which these companies will be investing, the kinds of materials they will be using, the methods of manufacturing they will employ, and the employees required to design and manufacture these vehicles. Given the high degree of uncertainty around the future availability of charging stations or other infrastructure necessary to make electric vehicles more convenient to use, and of the kinds of product attributes that will make consumers want to buy electric vehicles, the answer to this demand question is potentially complicated and error prone.

Consider on the other hand a company in Canada’s garment industry, such as Canada Goose. As manufacturer of the well-known Canada Goose line of winter coats and parkas, the demand for labour at Canada Goose is probably tied fairly closely to sales of its products. While some styles will always be more fashionable than others, forecasting the demand for labour at Canada Goose over the next 10 years is prob- ably more straightforward than at an electric car manufacturing facility. Because of the variety in the complexity and levels of uncertainty in forecasting the demand for labour, there exist multiple forecasting methods. These methods can be divided into two main categories: quantitative methods and qualitative methods. The two main factors that determine whether a quantitative model or qualitative model is a better choice are the degree of uncertainty involved in the demand forecast, and the volume and complexity of the data that are available to assist in creating the demand forecast.

CERTAINTY IN FORECASTING Some quantitative models are based on what is known about existing relationships between a level of consumer demand or production, where a forecast already exists, and human capital demand. For example, a large furniture manufacturing company that produces a particular type of reclining chair probably knows its market quite well. It understands who its competitors are, how large a share of the market for recliners it holds, and con- sequently how many recliners it expects to sell over the next six months. The company would easily be able to measure the number of employees and hours required to build each chair, and so calculating the demand for employees over the next six-month period is simply based on a known forecast of customer demand. In this case, the demand for recliner chairs is fairly stable, because the market for recliner chairs is fairly stable. There exists a comparatively high degree of certainty in the market, and so a simple model based on an existing forecast provides an effective model for assessing the demand for labour.

VOLUME AND COMPLEXITY OF AVAILABLE DATA While no forecast is ever perfectly accurate, it may be possible to improve the accuracy of forecasting by including more factors that contribute to changes in demand. For example, customer demand for some products may be highly seasonal, and so produc- tion and consequently the demand for labour will change seasonally. Rather than basing

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NEL106 Strategic Human Resources Planning

demand forecasts on total sales per year, labour demand forecasts can be produced that follow product sales more closely when the seasonality of sales is included. In this case the demand for labour is based on product demand, but also includes data that relate to when that demand ebbs and peaks.

Organizations interact with their environments. Because the environment (cus- tomers, competitors, the economy etc.) is always changing, the complete set of factors that predict the demand for a particular job, set of jobs, or set of tasks may never be known. However, by observing how the demand for labour changes, theorizing what might influence changes in demand, and collecting data based on theory and obser- vations, it may be possible to increase the consistency of forecasts. This is what the forecasters at OPG did to assess the factors that influence the demand for engineering technicians in the case at the end of this chapter. However, this increase in consistency comes at the price of collecting data over longer periods of time and collecting data from a wider variety of sources.

In general, quantitative models are better when forecasting demand in stable markets when there is a high degree of certainty in the relationship between the demand for labour and the indicators of that demand. As the volume and complexity of data that are available increase, quantitative models can deal with higher levels of uncertainty, but when uncertainty becomes very high, as in the case for something like the market for electric vehicles over the next three years, qualitative models become preferable. HR Planning Notebook 5.4, found toward the end of the chapter, summarizes the types of data used for quantitative and qualitative models, and the resulting outcomes from each model type.

// QUANTITATIVE METHODS TREND/RATIO ANALYSIS Trend analysis is a general term for any type of quantitative approach that attempts to forecast future human capital needs by extrapolating from historical changes in one or more organizational indices. A basic form of trend analysis could be plotting previous levels of employment to determine future needs. This method uses prior employment numbers for a job as the organizational index, and assumes that the future will be quite similar to the past because the inferences that are being made about future employee requirements are based on observations of actual past needs. Trend analysis can be used to spot how changes in other attributes such as sales, inventory levels, revenues etc., might correspond with changes in employee requirements. Figure 5.1 demonstrates how prior knowledge of employee numbers can be used in a trend analysis to predict future requirements.

Ratio analysis involves examining the relationship between an operational index and the demand for labour (as reflected by the number of employees in the workforce) and is a relatively straightforward quantitative demand forecasting technique commonly used by many organizations.1 For example, an organization may choose to look at the ratio of sales to employees. Although sales level is probably the most common index used by organizations, other operational indices include (1) the number of units produced, (2) the number of clients serviced, and (3) the production (i.e., direct labour) hours. Similarly, although the relationship between the operational index and workforce size (number of employees) can be calculated for the entire organization, as well as for the

Trend analysis A forecasting method that extrapolates from historical trends

Ratio analysis A quantitative method of projecting HR demand by analyzing the his- torical relationship between an operational index and the number of employees required

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NEL 107CHAPTER 5 Determining HR Demand

FIGURE 5.1

USING TREND ANALYSIS TO PREDICT FUTURE REQUIREMENTS

department or operational subunit, some organizations use ratio analysis to ascertain demand requirements for (1) direct labour and (2) indirect labour (e.g., HR staff). HR Planning Notebook 5.1 shows an example of ratio analysis.

There are five steps to conducting an effective ratio analysis.

1. SELECT THE APPROPRIATE BUSINESS/OPERATIONAL INDEX

The HR forecaster must select a readily available operational index, such as sales level, that is (1) known to have a direct influence on the organizational demand for labour and (2) subjected to future forecasting as a result of the normal business planning process.

2. TRACK THE OPERATIONAL INDEX OVER TIME

Once the index has been selected, it is necessary to go back in time for at least the four or five most recent years, but preferably for a decade or more, to record the quantitative or numerical levels of the index over time.

3. TRACK THE WORKFORCE SIZE OVER TIME

Record the historical figures of the total number of employees, or, alternatively, the amount of direct and indirect labour (see above) for exactly the same period used for the operational index in step 2. By estimating output, managers can predict labour inputs that are needed.

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NEL108 Strategic Human Resources Planning

4. CALCULATE THE AVERAGE RATIO OF THE OPERATIONAL INDEX TO THE WORKFORCE SIZE

Obtain the employee requirement ratio by dividing the level of sales for each year of historical data by the number of employees required to produce that year’s level of sales. This ratio is calculated for each year over the period of analysis so that an average ratio describing the relationship between the two variables over time can be determined.

5. CALCULATE THE FORECASTED DEMAND FOR LABOUR

Divide the annual forecast for the operational index by the average employee require- ment ratio for each future year to arrive at forecasted annual demand for labour. For example, obtain future sales forecast figures for the next five years. For each of the years, divide the level of sales by the average employee requirement ratio to obtain the forecasted numerical demand for labour for each future year.

TIME SERIES MODELS Times series models use past data to predict future demand. They can range from very simple to highly complex. For example, a simple time series model might use the value from the last season as the estimate. If trying to forecast the number of employee hours required to work in a retail store during December, the HR planner might use last December’s total sales, or a ratio of sales to total hours worked as an estimate for this year. The ratio analysis in Planning Notebook 5.1 is a form of time series design that uses the data from the current year (period) to predict next year’s demand. Other forms of time series designs use more information from previous years; for example, a simple moving average may use the average values for actual demand data over the

HR PLANNING NOTEBOOK 5.1

YEAR OPERATIONAL INDEX

SALES ($ THOUSANDS) NUMBER OF EMPLOYEES

EMPLOYEE REQUIREMENT RATIO (SALES PER EMPLOYEE)

2014 2,800 155 18.06 2015 3,050 171 17.83 2016 3,195 166 19.25 2017 3,300a 177 18.64 2018 3,500a 188b 18.64c

2019 3,600a 193b 18.64c

2020 3,850a 207b 18.64c

RATIO ANALYSIS: PUSLINCH POTTERY

a The initial forecast is developed based on 2017 actual data. We are forecasting labour demand for 2018, 2019, and 2020, and therefore sales figures for those years are future estimates.

b Employee numbers are historical, except for the figures for 2018, 2019, and 2020, which are our future HR demand forecasts. c The index used to calculate future demand (number of employees) can be the most recent figure, or an average of the up-to-date period (e.g., the

past four years, for which the average is 18.44). In this trend analysis, the most recent ratio (18.64) for the year 2017 was used for forecasting.

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NEL 109CHAPTER 5 Determining HR Demand

HR PLANNING NOTEBOOK 5.2

YEAR OPERATIONAL INDEX SALES

ACTUAL NUMBER OF EMPLOYEES

REQUIRED

ACTUAL EMPLOYEE REQUIREMENT

RATIO (SALES PER EMPLOYEE)

FORECAST NUMBER OF EMPLOYEES REQUIRED

FORECAST EMPLOYEE

REQUIREMENT RATIO (3-YR MOVING AVG

OF SALES PER EMPLOYEE)

2014 $2,880 155 18.06 2015 $3,050 171 17.83 2016 $3,195 166 19.25 2017 $3,300 177 18.64 2018 $3,500 185 18.92 188 18.57 2019 $3,600 200 18.00 190 18.94 2020 $3,850 210 18.3 208 18.52

The forecast employee requirement ratio is developed from the prior 3 years of actual employee requirement ratios. For example, the forecast ERR for 2018 is calculated as the average of the actual ERR for 2015, 2016, and 2017, or (17.83 1 19.25 1 18.64)/3 5 18.57

TIME SERIES ANALYSIS: PUSLINCH POTTERY

past two or three periods as the estimate for future demand. HR Planning Notebook 5.2 shows an adaptation of the trend analysis in Notebook 5.1 that uses a simple moving average. Another form of moving average is a weighted moving average, in which all periods of actual demand data are used to estimate future demand, but greater weight is given to more recent demand data. A weighted moving average places more impor- tance on recent demand data. To capture seasonality or trends in demand, exponential smoothing is used. Exponential smoothing also uses all past demand data, but places much greater weight on the most recent demand data (even greater weighting than a weighted moving average).

Although trend/ratio analysis is widespread due to its ease of use, remember that the analysis usually incorporates only the relationship between a single business vari- able and demand for labour (workforce size). By design, any single-variable relationship provides a relatively simplistic forecast of demand. For more comprehensive analyses that reflect a variety of factors affecting business operations, such as customer prefer- ences, interest rates, level of unemployment, consumer disposable income, and so on, the quantitative techniques normally employed are multivariate regression or other similar modelling/programming models.2 These models typically depend on large amounts of reliable data.

REGRESSION ANALYSIS Regression analysis can be thought of loosely as an extension of trend analysis, except that rather than using a single operational index (which in regression would be called the independent or predictor variable), regression uses more data than the ratio of the

Regression analysis Presupposes that a linear relationship exists between one or more independent (causal, or predictor) variables, which are predicted to affect the dependent (criterion) variable—in our instance, future HR demand for human capital (i.e., the number of employees)

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NEL110 Strategic Human Resources Planning

operational index to employees, and regression can use multiple predictor variables to forecast the required number of employees. The purpose of regression is to estimate a trend or relationship between one or more predictor variables and an outcome variable (see HR Planning Today 5.1 for an example of regression analysis). If we are able to predict enough variability in the outcome (or criterion) variable with our trend line, then the trend line may be used to extrapolate beyond the data at hand to create a forecast. If we have a single predictor variable, and plot the predictor variable (e.g., sales) along the x-axis, and plot the criterion variable (which in our case would be the number of employees required) on the y-axis, we might get something that looks like the scatter- plot in Figure 5.2a. Remember that the predictor variable is the information that we are using to try to predict or forecast the number of required employees; in this case, we are trying to predict the number of employees who will be required as sales revenues increase. Where trend analysis borrows information from a single or from several data points on the scatterplot to derive an employee requirement ratio, regression borrows information from all the data points to predict the criterion. Regression essentially draws a line that best describes the trend or relationship between the predictor and the criterion as shown in Figure 5.2b. It does this by drawing the line that reduces the sum of the distances between each point on the scatterplot and the line.3 The slope of that line represents the amount of variability in the criterion that can be described by the independent variable. By travelling up or down that trend line we can predict the number of employees required for a given level of sales. When a regression includes two

Sales

Em pl

oy ee

FIGURE 5.2A

SCATTERPLOT

Sales

Em pl

oy ee

FIGURE 5.2B

TRENDLINE

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NEL 111CHAPTER 5 Determining HR Demand

independent variables (e.g., sales as well as production volume), another axis is added as in Figure 5.3, and the regression line becomes a three-dimensional regression plane. A regression can include as many variables as make sense for the model, although the model becomes more complex. This begs the question how many predictors are best, and what are good predictors?

The choice of predictor (also known as independent) variables is based on a logical or theoretical basis for assuming that a change in each predictor should for one reason or another lead to a change in the criterion (or outcome, which is the demand forecast). When trying to predict demand, it is useful to try to include enough independent vari- ables to predict as much variability in the criterion as possible. For example, if we are trying to predict the number of vehicle service technicians required at a car dealership, we could develop a model based on a single predictor such as the number of monthly service appointments. If the variability in the number of service technicians and the variability in the number of monthly service appointments are represented by the two circles in Figure 5.4a, the overlap between the two circles represents the amount of variability in the number of service technicians that is accounted for or explained by our predictor (the number of service appointments). Because there is still quite a bit of variability in the number of service technicians left unexplained by our model, and because it would be fairly easy to think of a few more possible predictors, it might be prudent to add more predictors to our model. If we add the revenues generated from service appointments as another predictor, we can see that the model with two predictor variables predicts even more of the variability in the number of service technicians required (Figure 5.4b). We can continue to build our model until we have exhausted the choice of reasonable predictor variables, or until we have predicted most of the variability in the number of required service technicians.

FIGURE 5.3

THREE-DIMENSIONAL REGRESSION PLANE

Production Sales

Employees

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NEL112 Strategic Human Resources Planning

Variability in number of ser vice appointments

Variability in number of required ser vice technicians

FIGURE 5.4A

SHARED VARIABILITY BETWEEN PREDICTOR AND CRITERION

Variability in number of required ser vice technicians

Variability in number of ser vice appointments

Variability in ser vice appointments revenues

FIGURE 5.4B

INCREASE IN SHARED VARIABILITY USING MORE PREDICTORS

Some of the variables we select as predictors might be unnecessary. For example, if we are using the value of parts used by the service department as a predictor and add the total service department costs as another predictor, we might find that because the value of parts used comprises almost all of the total service department costs, the variability in these two predictors almost completely overlap one another with the criterion variable (Figure 5.4c). This means that these two predictor variables are very highly correlated, and that it is unnecessary to include both predictors in the model, as one predictor can

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NEL 113CHAPTER 5 Determining HR Demand

FIGURE 5.4C

THE PREDICTIVE REDUNDANCY OF HIGHLY CORRELATED PREDICTORS

Variability in total ser vice department costs

Variability in cost of parts

Variability in number of required ser vice technicians

do all the work of the other in terms of predicting variability in the criterion. Thus, the choice of the number of predictors can be guided by the results of the regression model itself and by the relationships between the predictors.

When developing a model, Meehan and Ahmed4 suggest grouping possible pre- dictor variables in three categories: (1) key variables, which are almost certain to play a role in predicting the employee requirement; (2) promising variables, which appear important and you suspect will probably relate to predicting the employee requirement; and (3) possible variables, which may not be necessary for the model. Once the variables have been selected, past data for the variables can be entered into a regression model and run through a statistics package (such as SPSS, SAS, R, or even Excel). The results of the statistics software will indicate how much variability in the criterion is predicted by the entire model; this is called the coefficient of determination. Again, the more variability in the criterion variable that is predicted by the model, the better. The model can be refined until the maximum amount of variability is predicted.

At this point, the HR planner can use the model to forecast future needs for ser- vice technicians based on known values of the predictor variables, and use the model to create “what if ” scenarios. The relative strength of each of the predictor variables is assessed using regression, which provides an understanding of the sensitivity of the criterion variable to changes in each of the predictors. This flexibility and ease of use as a modelling tool once the model has been developed helps to make regression a powerful and highly useful forecasting tool. Given the explosion in the types and amount of data gathered by organizations today, regression models can benefit from this proliferation of data and help to make sense of an otherwise confusing mass of information.

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NEL114 Strategic Human Resources Planning

Limitations of regression: While regression models can be highly useful forecasting tools, like any powerful tool, statistical regression has its limitations. A primary limi- tation of regression is that it is very good at predicting linear relationships between variables but becomes an unreliable and potentially misleading tool for prediction when relationships are nonlinear. An example of a linear relationship between two variables might be the relationship between gas consumption and the number of kilometres driven per year. The more kilometres you drive, the more gas you will use. A nonlinear relationship might be the relationship between the sales at a grocery store and the number of required employees. While these variables should correlate, and while the relationship might be linear over a particular set of values, a grocery store requires a full complement of employees even when there are only a few shoppers, and as the number of shoppers and the size of their grocery carts increase, the numbers of additional employees required might be expected to increase at a decreasing rate. Thus, we might expect to see a relationship such as the one depicted in Figure 5.5, which is a fictional example showing that as sales increase, the number of required employees at first increases linearly, but then the rate of increase changes as economies of scale require proportionately fewer employees. Linear regression produces a prediction (or trend) line that is a straight line. Thus, when the relationship between a predictor and the criterion is not linear, it is not a good choice as a predictor. Because a stable, linear relationship cannot be assumed in emerging markets or in environments characterized by dramatic innovations, regression may not be an ideal forecasting method for highly unstable markets.

Finally, regression models require sufficient amounts of historical data on which to develop predictions. For newer or smaller firms, it may take some time to develop enough data to enable regression to be useful. A general rule of thumb to begin is that a minimum of 20 observations are required in order to detect a strong relationship; however, as the number of predictor variables increases in the model and as the expected effect size of the predictors on the criterion decreases, the number of required observa- tions becomes larger.

Summary: Regression models help HR planners to make use of large amounts of organizational data. These models can be easily adapted to reflect organizational changes or new assumptions, and are a good choice for short-term, medium-term, and long-term forecasts. However, quantitative models based on historical data may not be the best indicator of future needs if the business or environment is in a period of significant transition.

Sales

N um

be r o

f E m

pl oy

ee s

FIGURE 5.5

NONLINEAR RELATIONSHIP

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HR PLANNING TODAY 5.1

REGRESSION IN ACTION

To get a sense of how regression may be used, we will take a very simple, fictional case of a motorcycle manu- facturer. Lacrosse Motorcycles represents the rejuvena- tion of an iconic brand of motorcycle from the 1960s. The motorcycles the company produces are large, rugged bikes that are technologically simple, and inexpensive to buy and maintain. Lacrosse has been growing rapidly

since first opening its doors almost five years ago, and now has sales and production data from approximately 20 quarterly periods. Using prior information about pro- duction, sales, and the numbers of full-time equiva- lent employees working during each of those quarters, we would like to forecast the company’s demand for employees as it grows.

SALES PRODUCTION EMPLOYEES 70 20 50 74 22 55 80 25 62 82 27 70 83 32 70 102 40 85 88 45 75 95 33 75 55 35 75

SALES PRODUCTION EMPLOYEES 97.5 40 80 100 50 85 105 52 92 108 55 95 120 60 105 135 70 115 150 75 125 165 80 135 175 90 150

We can examine the extent to which production predicts the number of required employees by building a regression using production as the only predictor of employees. The resulting plot of our data including the regression trend line is shown here:

The equation for the trend line, which we get from our statistics package, looks like this:

Employees 5 27.3 1 (1.3) 3 production

Our statistics package also reports the coefficient of determination as 0.97, which can be interpreted as meaning that 97 percent of the variability in the number of employees can be explained by production. This is clearly very high and is much higher than you might see in most real-life situations. The equation can be inter- preted as meaning that for every one-unit increase in production, we will need 1.3 more employees. The 27.3 number represents the intercept point on the graph where the predictor (in our case, production) is zero. While the number of workers required when production is zero is probably not relevant to the forecaster, this point shows where the trend line begins for these data. So, if we want

to extrapolate how many employees we will need when production ramps up to 200 motorcycles, we simply insert it into our formula:

Employees 5 27.3 1 (1.3) 3 200 motorcycles

This means that in order to produce 200 motorcycles, we will need 27.3 + 260 = 287 employees. The trend line shows production values and the required number of employees for values that are included in the data. How- ever, we have used the regression equation to extrapolate beyond the data to forecast a future anticipated level of production. In this way, regression is useful for making predictions beyond the data at hand, provided that it is safe to assume that the relationship between the predictor and the outcome is more or less linear.

Not forgetting that we also have sales data, we can create another model that includes sales into our regression. The results of this statistical analysis are the following:

Employees 5 19.82 1 (0.97) 3 Production 1 (.22) 3 Sales

(continued )

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NEL116 Strategic Human Resources Planning

Our statistics package reports the coefficient of determination for this model is .975, which means that 97.5 percent of the variability in the number of employees required can be accounted for by both production and sales. The model is interpreted as saying that when holding production constant, for every one-unit increase in sales (sales units are in thousands of dollars, so one-unit of sales equals $1000), we require 0.22 more employees. When holding sales constant, every one-unit increase in production requires 0.97 more employees. This suggests that our model is more sensitive to changes in production

than to changes in sales.5 How does this compare to our earlier (and simpler) model? This model predicts .5!per- cent more variability in employees than our model that uses just production. Is that worth making the model more complicated? Probably not, as we are just as well served by the model that uses only production as a predictor of employees. The best regression model is the simplest model that predicts the most variability in our criterion variable. Thus, the best model given these data is our first model that uses production as a single predictor of employees.

14 0

10 0

60 20 30 40 50 60

Production

Em pl

oy ee

s 70 80 90

Customer demand

Supplier dependability

Employee turnover

Demand for manufacturing

employees

Advertising and

marketing

Interest rates

New home starts

Competitor product cycle

Our price

FIGURE 5.6

STRUCTURAL EQUATION MODEL

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NEL 117CHAPTER 5 Determining HR Demand

STRUCTURAL EQUATION MODELLING Structural equation modelling (SEM) can be thought of as a process similar to regres- sion, except where regression deals with a single outcome variable at a time, there can be many outcome variables in a single SEM model. This permits the use of more vari- ables and the development of more complex models using SEM. The primary drawback to SEM versus regression is that SEM typically requires more data observations than regression.

Forecasters can develop a model of labour demand based on their own theory as to what factors may be driving demand. Provided that measures exist for each of the variables in their proposed theoretical model, and provided that enough data has been collected on each variable, forecasters can use SEM to statistically test the effect of their proposed model on demand. Figure 5.6 shows a fictitious example of a basic structural equation model of employee demand for the job of a manufacturing worker in a company that produces recliners.

// QUALITATIVE FORECASTING TECHNIQUES Quantitative models can be very useful, especially in mature industries or where envi- ronmental changes are predictable or stable. When there is a great degree of uncertainty, qualitative models may be preferable. Qualitative models may also be useful when no formal planning exists, and no formal data collection occurs around a planning process. Qualitative forecasting in the form of direct managerial input is the most commonly used method for determining workforce requirements.6

MANAGEMENT SURVEY A large portion of Canadian companies use basic forms of human capital planning, and some do not forecast their demand for human capital at all.7 Those firms that do no planning essentially hire on an as-needed basis. As jobs become open through attrition or expansion, the line manager notifies the HR department of the need to hire, and the recruitment process is initiated. Basic informal planning occurs when managers anticipate their needs over the near term, and submit requests based on their knowledge of and past experience with the business.

Using experts to arrive at a numerical estimate of future labour demand is considered to be a more formal qualitative process for determining future labour requirements, because it is a detailed process of stating assumptions, considering potential organizational and environmental changes, and deriving a rationale to support the numerical estimate.

One of the issues with qualitative decision methods, as pointed out by Philip Tetlock8 in his book Expert Political Judgment: How Good Is It? How Can We Know? is that experts are very often wrong. However, James Surowiecki9 finds that groups of people are very often correct. Qualitative forecasting methods such as the Delphi technique and nominal group technique make use of groups of experts in an effort to increase the validity and reliability of the forecast and of the information used to formulate the forecast. When a group of experts is involved in a forecasting exercise, each expert benefits from the knowledge and assumptions of all other experts involved. This way, the limitations of any single mental model used by any single expert are reduced by

Structural equation modelling (SEM) A statistical technique that permits the testing of multiple relationships simultaneously in a theoretically derived model

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NEL118 Strategic Human Resources Planning

exposure to others. Furthermore, qualitative methods of forecasting such as these increase the reliability of the information by working through an iterative process where each expert has the opportunity to clearly explain his or her assumptions and decisions. This means that all experts share the same understanding of one another’s assumptions before arriving at a final forecast decision.

A wide variety of individuals may be considered experts for their knowledge of organizational operations, competitive HR practices, international trends in the labour markets, and so on.10 First and foremost, the organization’s own line managers, who each have detailed knowledge of workload, responsibilities, and overall task responsibilities for a department, possess important insights into how future demand for labour should or might change in the manager’s own areas of responsibility. Second, the organiza- tion’s HR and line managers certainly have critical information to provide guidance in forecasting future levels of labour demand. For example, the planning staff may use econometric and strategic models to predict the future level of sales of, or demand for, the organization’s goods and services, as well as provide important insights into future economic indicators affecting labour demand such as interest rates, change in gross national product, level of consumer disposable income, savings, and so on. The HR staff, whether they are HR generalists or a team of HR planning specialists, are able to draw up a detailed set of assumptions with respect to industry, local, and international labour market trends that affect how the organization organizes and employs its own workforce. Third, business consultants, financial analysts, university researchers, union

HR PLANNING NOTEBOOK 5.3

DIVERSITY AND DEMAND

The rate of growth in participation in the Canadian labour force for women and visible minorities is expected to out- pace the rest of the labour market until the early 2030s. Because a majority of the new entrants into the labour force will be women and visible minorities, it is impor- tant for firms to develop diversity plans. Furthermore, Canada’s Employment Equity Program requires that all federally regulated firms (which include banks, telecom- munications firms, air and rail transportation companies, and the federal government) produce annual reports of the representation of members of the four designated groups in their organizations, and plans to achieve full representation. Therefore, in addition to forecasting the demand for particular jobs, organizations should incorpo- rate demand estimates for increasing participation among Canada’s designated groups. Diversity has the potential

to increase organization-wide performance when diversity goals go beyond participation rates for protected groups, and incorporate the mental models used by members of protected groups when setting strategy and determining the core activities of the firm.

One way to understand diversity requirements is by comparing the diversity of the applicant pool and of the firm’s employees to that of the general population. If the diversity of the applicant pool or of employees is substantially different from the Canadian population, strategies can be developed to increase the recruitment and selection of members of designated groups. Can you suggest a type of model that might be useful to forecast diversity needs? How might diversity needs be integrated into methods of forecasting demand for jobs or neces- sary skills?

Sources: Government of Canada, “2006 Employment Equity Data Report: Designated Group Profiles,” retrieved from http://www.labour.gc.ca/eng/ standards_equity/eq/pubs_eq/eedr/2006/profiles/page06.shtml; Government of Canada, “2013 Employment Equity Act Annual Report: Employment Equity,” retrieved from http://www.labour.gc.ca/eng/standards_equity/eq/emp/index.shtml; and Thomas, D.A., and Ely, R.J. (1996) Making Differ- ences Matter: A New Paradigm for Managing Diversity, Harvard Business Review, 74(5), pp. 79–90.

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staff members, industry spokespersons, and others possess detailed knowledge of spe- cific industries or types of organizational activity and are able to give rich, detailed, and largely impartial judgments on future labour demand because of their external perspective relative to the organization. Finally, but not exclusively, federal, provincial, and local governmental staff and officials are important individuals to consult, because they possess knowledge of future environmental changes in labour and business legisla- tion that can dramatically change labour demand not only for a specific organization but also for the industry in general. For example, pending legislation to ban the use of certain materials in product manufacturing might cause a substantial drop in demand for these products and hence an associated reduction in demand for employees who are involved in their manufacture.

Government ministries and departments, most specifically those devoted to labour, HR, economic development, and Statistics Canada, can all provide expert information for the labour demand forecasting process. Interviews, questionnaires (conducted in person or by mail or email), and telephone conference calls are some of the options available for gathering information from experts, but other techniques can be employed to maximize the benefit of each expert’s contributions in specific circumstances. We now turn our attention to some of these methods of facilitating high-quality labour demand forecasts.

SCENARIO PLANNING Scenario planning is a method often used to develop organizational strategy. A primary strength of scenario planning as a strategy-setting tool is that it encourages participants to develop strongly shared mental models of future organizational states. Scenario plan- ning is a method for imagining future possible conditions in which the organization might operate. As a technique, it requires participants to challenge existing assumptions and to generate vivid pictures of possible future states. The general process of scenario planning is as follows:

1. Propose the forecasting question about the future state of the firm or environment. For example, “how many households will own an electric car in 10 years”?

2. Generate a list of factors that are likely to influence the outcome in question. It is often useful to perform a SWOT analysis that takes into account fac- tors such as the economy, the political landscape, society, and the impact of technology.

3. Sort the factors into naturally occurring groups and rank the groups according to their importance to the main question and the ability of the firm to control the factor. Factors that the firm has less ability to control should receive higher rankings.

4. Select the two groups of factors that are likely to have the strongest and most unpredictable impact on the question. Create four quadrants (see Figure 5.7) by stretching one group along a continuum from its extreme negative con- dition to its extreme positive condition on the x-axis and the other group along a continuum from its extreme low to high conditions on the y-axis.

5. Name and describe in story form each of the four worlds in the four resulting quadrants.

Scenario planning A method for imagining future possible organi- zational states and the resulting capabilities, activities, or strategies that are necessary to be successful in those future states

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NEL120 Strategic Human Resources Planning

6. Suggest the skills, competencies, and other organizational requirements that would be necessary for the firm to be able to operate in each of these four worlds.

7. Generate a demand forecast necessary to fulfill the firm’s requirements in each of the four worlds.

The process of describing each of the proposed worlds helps participants to under- stand ways in which current mental models are influencing thinking and action, and to develop new shared mental models. The benefit that scenario planning brings to demand forecasting is that while there is really no limit to the number of possible scenarios that the future could hold, this method allows planners to understand the most important assumptions that go into each demand forecast. Understanding what assumptions are the most influential to a demand forecast helps the planner to know how sensitive the forecast is to each assumption. For example, if the scenario planning exercise suggests that the driving range and passenger capacity of electric cars are the factors that will most influence the future demand for electric cars, then demand estimates for the future number of employees required to produce electric cars will be most sensitive to changes in these assumptions. In other words, potentially small changes to these assumptions could bear large differences in the demand estimates for employees. Scenario planning therefore assists planners in developing a variety of future demand scenarios, and helps planners to understand how much leeway exists in any one demand forecast before that forecast is no longer viable.11

This flexible demand forecasting process is very useful for incorporating the effects of uncertainty and change into the strategic HR planning process. Each of the scenarios or predicted future states contains its own set of assumptions, resulting in an entirely

F1 Extreme Positive Perspective Driving range 600 km between charges

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Estimate employee demand when vehicle can carry 1 passenger 600 km

Estimate employee demand when vehicle can carry 7 passengers 600 km

Estimate employee demand when vehicle can carry 7 passengers 80–100 km

Estimate employee demand when vehicle can carry 1 passenger 80–100 km

F2 Extrem e Positive Perspective

Seating for 7 passengers plus cargo

F1 Extreme Negative Perspective Driving range 80–100 km between charges

FIGURE 5.7

SCENARIO PLANNING

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NEL 121CHAPTER 5 Determining HR Demand

different estimate presented in a single staffing table for each specific course of action. In this way, an organization’s HR staff are able to develop, with the associated staffing tables, future scenarios that are optimistic (e.g., sales levels will increase by 10 to 15 per- cent), realistic or most likely (e.g., sales levels will increase by 5 to 10 percent), or pes- simistic (e.g., sales levels will remain constant or increase by less than 5 percent). By means of this comprehensive, explicit set of staffing tables, which reflects a wide variety of future organizational circumstances, the scenario planning technique allows ready access to flexible, preplanned demand estimates when circumstances rapidly change.

DELPHI TECHNIQUE The Delphi technique, named after the Greek oracle at Delphi and developed by N.C. Dalkey and associates at the Rand Corporation in 1950, is another useful qualitative method for deriving detailed assumptions of long-run HR demand.12 This forecasting technique is “a carefully designed program of sequential, individual interrogations (usu- ally conducted through questionnaires) interspersed with feedback on the opinions expressed by the other participants in previous rounds.”13 Its key feature is that once a group of experts is selected, the experts do not meet face to face.14 Instead, a project coordinator canvasses them individually for their input and forecasts by means of a progressively more focused series of questionnaires.

The advantage of the Delphi technique is that it avoids many of the problems associated with face-to-face groups, namely reluctance on the part of individual experts to participate due to (1) shyness, (2) perceived lower status or authority, (3) perceived communication deficiencies, (4) issues of individual dominance and groupthink (i.e., group conformity pressures), and so on.15 Because the Delphi technique does not employ face-to-face meetings, it can serve as a great equalizer and can elicit valid feedback from all expert members. It is also advantageous that the Delphi technique can effectively use experts who are drawn from widely dispersed geographical areas.16 See HR Planning Today 5.2 for more details on the Delphi technique.

There are disadvantages associated with the Delphi technique, as there are with all forecasting techniques. In particular, because of the series of questionnaires administered to derive a forecast, the time and costs incurred when using the Delphi technique can be higher than those incurred when using alternative forecasting methods. Another deficiency is that since the results cannot be validated statistically, the process is greatly dependent on the individual knowledge and commitment of each of the contributing experts.17 Furthermore, if the experts are drawn from one specific field, their common professional training might guide them along a single line of inquiry (i.e., follow a single mental model) rather than pursuing more innovative and creative courses of action. Finally, if insufficient attention has been paid to developing criteria for the identification and selection of experts, the people selected to derive the demand forecasts may lack sufficient expertise or information to contribute meaningfully to the process.18 There are six steps associated with using the Delphi technique for HR demand forecasting.

1. DEFINE AND REFINE THE ISSUE OR QUESTION

During this stage, a project coordinator is assigned, and he or she works with the HR staff to determine the specific job or skills category or activity that will be the focus of the Delphi technique. It is essential that the group targeted for HR forecasting be

Delphi technique A process in which the forecasts and judgments of a selected group of experts are solicited and summarized in an attempt to determine the future HR demand

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NEL122 Strategic Human Resources Planning

HR PLANNING TODAY 5.2

THE DELPHI TECHNIQUE IN ACTION

The Delphi technique is used in a wide variety of appli- cations for HR forecasting. For example, an agricultural research organization started by deriving nine organiza- tional core competencies from interviews and internal organizational documentation. The experts were identi- fied by the organization, which asked them to respond to a set of questionnaires based on the Delphi technique. The questionnaires investigated:

1. The importance of human competencies in the future

2. The capacity of the organization’s current human resources

3. Ranking the nine organizational core competencies in order of priority

HR policy interventions were developed from the resulting information.

A three-round Delphi procedure was used to identify the basic competencies of research chefs, who develop new products, create new recipes, and conduct food testing.

Thirty-three expert chefs were involved in the Delphi under- taking, and they were asked questions concerning:

1. Factors differentiating successful from less suc- cessful research chefs

2. Knowledge and skills required by successful research chefs

3. How tasks for a research chef differ from those of an ordinary chef

The experts identified 19 basic competencies that a successful research chef should possess.

Finally, subsequent to the September 11, 2001, ter- rorist attacks on the United States, the Delphi technique was used by the government and insurance and risk man- agers to estimate the possibility of future losses due to terrorism, and the likely types of terrorist acts various organizations might experience. Experts used the Delphi technique to analyze databases on landmarks, tourist attractions, “vital points,” and property assessment data to come up with their forecasts.

well defined so that relevant, focused, and detailed feedback based on a minimum of assumptions (redundant assumptions are associated with loss of the experts’ time) can be derived.

2. IDENTIFY THE EXPERTS, TERMS, AND TIME HORIZON

The project coordinator, normally in conjunction with the HR staff, identifies and selects a team of individuals deemed to be experts with respect to the specific human capital grouping that requires a forecast. The number of experts to include in an expert panel (see below) typically range between 7 and 15.19 Next, given that in many cases the group of experts will include individuals who are not members of the organiza- tion, it is important for both parties to reach agreement on the terms and conditions for participation in the forecasting process, as well as setting the context and explicitly defining the nature of the work. For example, the team of experts must be absolutely clear on which jobs constitute “production workers” if those experts are being asked to

Sources: Adapted from T. Guimaraes et al., “Forecasting Core Competencies in an R&D Environment,” R&D Management, Vol. 31, No. 3 (July 2001), pp.!249–255; K. Birdir and T. Pearson, “Research Chefs’ Competencies: A Delphi Approach,” International Journal of Contemporary Hospitality Manage- ment, Vol. 12, No. 3 (2000), pp. 205–209; and B. Coffin, “Forecasting Terrorism Losses,” Risk Management, Vol. 49, No. 11 (November 2000), pp. 8–9.

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derive a demand forecast for this category. Similarly, the exact time horizon(s) must be specified for the human capital category being analyzed.

3. ORIENT THE EXPERTS

In addition to identifying the relevant time horizon(s) and clarifying which employee groups are of interest, the orientation process for experts includes an overview of the demand forecasting decision process (which is very similar to the structural framework in which you are now engaged!). The experts are told either that there will be a prede- termined number of questionnaire iterations or that the sequence will continue until a majority opinion exists among the experts.

4. ISSUE THE FIRST-ROUND QUESTIONNAIRE

The project coordinator sends each expert the questionnaire by courier, fax, mail, or email and includes a time frame for completing and returning it. Typically, this first questionnaire focuses on defining both the explicit assumptions made by each of the experts and the background rationale supporting his or her particular demand estimate.

5. ISSUE THE FIRST-ROUND QUESTIONNAIRE SUMMARY AND THE SECOND ROUND OF QUESTIONNAIRES

Following the completion of the first questionnaire, the project coordinator sends the second and subsequent rounds of questionnaires to the experts with a written summary of the findings from the previous round. The aim of the subsequent questionnaires is to focus the experts’ initial assumptions and estimates by providing summarized feedback from all members of the group. Points of commonality and conflict are identified in the summary, as is the need to clarify specific assumptions identified by the responses to the previous round.

6. CONTINUE ISSUING QUESTIONNAIRES

The project coordinator continues to issue questionnaires until either all the predeter- mined questionnaire stages have been completed and summarized or the group reaches a clear majority decision. In either case, the majority or nth-round summary summarizes the experts’ future demand estimate for the HR category under analysis.

NOMINAL GROUP TECHNIQUE Although the nominal group technique (NGT) is also a long-run, qualitative demand forecasting method, it differs from the Delphi technique in several important respects. First, unlike in the Delphi technique, the group does, in fact, meet face to face and interact, but only after individual written, preparatory work has been done and all the

Nominal group technique (NGT) Long-run forecasting technique utilizing expert assessments

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NEL124 Strategic Human Resources Planning

demand estimates (idea generation) have been publicly tabled, or written on a flip chart, without discussion.20 Second, each demand estimate is considered to be the property of the entire group and to be impersonal in nature, which minimizes the potential for dominance, personal attacks, and defensive behaviour in sup- port of estimates presented in the group forum.21 Finally, the expert forecast is determined by a secret vote of all group members on their choice of the tabled demand forecasts. The estimate receiving the highest ranking or rating during the voting process is deemed to be the group’s forecast.22 A primary advantage to NGT is that it allows all participants to contribute to the process at an equal level by reducing the tendency for more extroverted indi- viduals to dominate the process.23 See HR Planning Today 5.3 for more information on the NGT. Readers are invited to experi- ence a nominal group technique as part of a group exercise at the end of this chapter.

// HR BUDGETS/STAFFING TABLES HR budgets are quantitative, operational, or short-run, demand estimates that contain the number and types of jobs or positions required by the organization as a whole and for each subunit, division, or department (see Table 5.1 for a hypothetical example for

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Expert opinion can be used to prepare estimates.

HR PLANNING TODAY 5.3

ASSESSING THE UTILITY OF THE NOMINAL GROUP TECHNIQUE

Studies have shown that nominal group technique (NGT) is especially effective for brainstorming sessions to ensure all participants have an equal voice in the ses- sions, and when a problem or issue stems from several widely diverse causes. Furthermore, studies have shown that NGT provides highly reliable and valid qualitative data that is ranked by importance, and is superior to that derived from focus group sessions. Nominal group ses- sions investigating teaching performance competencies on 13 dimensions (technical knowledge, planning and

organizing, managing interaction, commitment to teaching objectives, proactive orientation, student development ori- entation, class presentation ability, impact on the class, adaptability and flexibility, personal motivation, listening skills, oral communication skills, and presentation skills) were dramatically superior to information obtained from focus groups. The study predicted that nominal group technique will replace focus groups as the qualitative research method of choice and will reduce the need for the administration of surveys.

Sources: Adapted from B. Andersen and T. Fagerhaug, “The Nominal Group Technique,” Quality Progress, Vol. 22, No. 2 (February 2000), pp. 144–145; and B. Langford et al., “Nominal Grouping Sessions vs. Focus Groups,” Qualitative Market Research, Vol. 5, No. 1 (2002), pp. 58–70.

HR budgets Quantitative, operational, or short-run demand estimates that contain the number and types of jobs required by the organization as a whole and for each subunit, division, or department

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NEL 125CHAPTER 5 Determining HR Demand

STAFF DEMAND REQUIREMENTS

SALES ($ MILLIONS)

$1–10 >$10–25 >$25–50 >$50–75

ADMINISTRATIVE POSITIONS

President 1 1 1 1

Vice-presidents 1 1 2 3

Marketing managers 1 1 2 2

Sales staff 4 7 10 18

HR staff 2 4 5 7

Treasurer 1 1 1 2

Financial staff 3 5 7 9

Clerical and general staff 5 8 12 14

PRODUCTION POSITIONS

Executive chef 1 1 1 1

Chef 2 4 5 6

Cook 8 15 25 35

Haggis helper 10 20 30 40

Saucier 1 3 5 6

TABLE 5.1

STAFFING TABLE AND HR BUDGET, ENNOTVILLE EATERIES

the firm “Ennotville Eateries”).24 These HR budgets, prepared by the HR staff in conjunction with line managers, take into consideration information from historical company staffing trends, competitor staffing practices, industry and professional associations, and Sta- tistics Canada.

The HR budget process produces a staffing table, which con- tains information related to a specific set of operational assumptions or levels of activity (e.g., maintain the current organization structure, increase the sales level by 5 percent over last year’s level). The staffing table presents the total HR demand requirement, laid out in terms of the number of people required by level (e.g., vice-presidents) and function (e.g., marketing).

In this way, HR planners can determine short-run future demand requirements for subunits and the organization as a whole. This enables budgeting processes to incorporate changes in compensation costs linked to the level of future human capital demand.

Using a variety of indices, HR professionals can esti- mate the number and type of human capital needed.

to ck

/T hi

nk st

oc k.

co m

Staffing table Total HR demand requirement for opera- tional or short-run time periods

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NEL126 Strategic Human Resources Planning

// COMBINING QUANTITATIVE AND QUALITATIVE METHODS Quantitative and qualitative methods are not exclusive methods where the forecaster decides to use one method at the expense of the other. These two basic methods can both be used in order to test the reliability of the forecast. If both methods arrive at similar forecasts, then planners can be more certain of the results. However, if one method leads to dramatically different results from the other, then it would be reason- able to question the assumptions of both methods to try to understand where differ- ences in assumptions lead to discrepancies in the forecasts. HR Planning Notebook 5.4 demonstrates that the different types of information that quantitative and qualitative methods use as inputs to the forecast can arrive at complementary findings. By using both methods of analysis, planners can arrive at a richer, more detailed understanding of the demand for labour, and how the factors that affect demand can change those estimates. In addition to using both quantitative and qualitative methods in parallel, as discussed above, these methods can be combined to form a very powerful method of forecasting known as simulation.

HR PLANNING NOTEBOOK 5.4

DIFFERENCES BETWEEN QUALITATIVE AND QUANTITATIVE FORECASTING DATA

Quantitative and qualitative analyses can provide informa- tion that complement one another. The kinds of data that are used for each type of analysis are different, and these differences lead to different perspectives on issues. Ideally, both qualitative and quantitative analyses should suggest similar demand forecasts. When this occurs, planners can have more confidence in their processes. However, when

the two methods offer very different solutions, planners should investigate where these differences are coming from in their data, and seek to resolve the differences. In general, quantitative and qualitative methods can be compared based on the types of data that are used for each method, and the kinds of results that each method tends to produce.

Source: Adapted from Bartlett, K.R., Johnson, K.R., & Schneider, I.E. (2016). “Comparing strategic human resource development approaches for tourism and hospitality workforce planning,” Journal of Human Resources in Hospitality and Tourism, 15(4), 440–461.

TYPE OF DATA Quantitative Qualitative Economic Outlook Labour-force growth Labour-force projections Industry projections Occupational projections

Economic Outlook Demographics Political and regulatory environment Technological change Societal change

TYPE OF RESULTS

Quantitative Qualitative Detailed, numeric estimates More specific information that can easily be used

to produce HR system development plans

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NEL 127CHAPTER 5 Determining HR Demand

SIMULATION Simulation is a powerful blend of quantitative and qualitative analysis. It is based on the creation of a set of assumptions around the variables or inputs that are expected to affect demand followed by a quantitative representation of those assumptions and their interactions. These assumptions start at the macro level (e.g., the economy, changes in technology, political or legislative outcomes, or demographics), and then incorpo- rate organizational variables that could also influence demand such as the impact of technology or process changes in production. Simulation can be used to model both demand and supply, so models can also include supply-related variables such as the amount of time required for training to become competent at a job level, and seniority levels of employees in the job.

The assumptions that are used to build a simulation model employ mathematical algorithms that reflect how variables are expected to react dynamically with the other variables in the model. For example, the stock of employees in a job may not accurately represent the level of skilled employees in that job at any given point in time. If a job requires a lengthy training or mentoring period, then the flow of employees may be suitable, but stocks of suitably skilled employees may be low or high for the firm’s needs depending on where employees are in the training cycle. These types of delays and accumulation processes lead to relationships with other demand characteristics such as revenues or production that are not linear. Simulation can model these non linear dependencies, and so simulation has an advantage over regression and trend-based models for these types of applications.

The simulation process can be broken down into several steps:

1. Using qualitative methods, collect the relevant variables. This process can use interviews, focus groups, Delphi, or NGT to collect the information.

2. Describe how these variables interact together to by developing a process model to map the relationships between variables. Line managers who have direct experience with the manner and ways in which the demand for human capital changes over time and with sales are in an excellent position to pro- vide insights to this process.

3. Use simulation software and develop the algorithms to estimate the model. The range of assumptions developed qualitatively are used to run the simula- tion several thousand times. The output of the simulation presents a range of outcomes that occur most of the time. This range of outcomes represents the envelope of estimates over which a demand estimate is likely to occur given the current set of assumptions.

4. Test the model using historical data to validate the assumptions used in its development.

5. Different assumptions can be easily tested in the model by inputting new scenarios and re-running the simulation.

The main benefit of simulation in forecasting demand (and supply) is not in arriving at a more accurate forecast, but in developing a better understanding of what factors influ- ence demand and supply, and what processes may be causing bottlenecks in the flow of human capital. In this sense simulation is considered to be more descriptive of processes than prescriptive.25 The advantage of simulation is in providing knowledge around how demand estimates might react to changes in environmental factors, in customer charac- teristics, in the training or skills requirements of employees, or in any of the assumptions

Simulation A blend of qualitative and quantitative mod- elling that incorporates a set of assumptions about relationships among variables in a mathematical algo- rithm. Simulation can simultaneously model demand and supply, and is very useful for testing the impact of assumptions on the outcome of the model

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NEL128 Strategic Human Resources Planning

that are used to build the simulation model. While simulation forecasting is relatively new to the HR field, it has been used for a decade or more in the areas of operations and finance. HR practitioners in large organizations might be able to team with operations and/or the finance department to develop integrated simulation models that incorporate product demand with manufacturing constraints and human capital demand and supply to streamline the flow of resources across the firm. This kind of integration between cus- tomer needs and organizational resources can lead to faster response times for organiza- tions to provide services or products to customers, which has the potential to provide a source of competitive advantage through human capital planning, as discussed in HR Planning Today 5.4.

HR PLANNING TODAY 5.4

SIMULATION IN THE SKILLED SERVICES INDUSTRIES

Industries such as electric power utilities, home and industrial heating and cooling, electrical, and plumbing all require highly skilled workers, and all involve unpredict- able and volatile demand. When the Quebec ice storm of 1998 downed over 1000 electrical transmission towers, it left over a million Canadians without heat and water for days, and presented a large threat to the Canadian dairy industry, which was unable to feed or milk cows.

Shocks such as these may be rare, but the industries that deal with such events must be able to provide the ser- vices necessary to recover quickly. Planning must include scenarios for these rare occurrences. At a smaller scale, ser- vice providers for those services that we consider to be nec- essary, such as heating and air conditioning, are in a better position to service their customers when they have skilled technicians available whenever their customers have a need. However, the more ready a company is with technicians, the higher the potential for lost revenues from a surplus of techni- cians when demand is not at its peak. Therefore, having the right number of technicians available is a complex capability that could act as a source of strategic competitive advantage.

In the home heating/cooling industry in Canada, the demand for services is growing at a relatively stable rate, as demand is a function of the number of homes. However, the time required to develop a skilled technician to the point of being available for active service can be quite long, when considering the time to recruit and provide basic

and on-the-job training. Lead times can extend beyond 24 months for some jobs for highly skilled technicians. Mod- elling the demand for such jobs must therefore account for not only the stock of technicians, but also the flow of technicians from recruitment to the point of being fully active in the job. A simulation model will include vari- ables such as the recruitment rate (the number of techni- cians being hired), the number of employees taking basic training as well as the number of active employees working as trainers, the number of employees in the on-the-job training phase, the number of active employees, and the time it takes for employees to move from one phase to the next. Additional complications to this model include estimating the number of employees lost at each point of the cycle, as well as the number of trainers who must be removed from active service to perform basic training. As the demand for employees increases, the demand for trainers will increase to respond to the need to train the increased numbers of employees in basic training. Each phase of this model will have a mathematical equation that is intended to simulate changes in the variables over time, and their relation to other variables in the model.

Simulation models require skills in mathematics and logistics to develop the algorithms used, but the concep- tual basis of the model and the assumptions around the building of the model require as much involvement from HR and the business line.

Source: Adapted from Grossler, A., and Zock, A. (2010). “Supporting long-term workforce planning with a dynamic aging chain model: A case study from the service industry,” Human Resource Management, 49, pp. 829–848.

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// SUMMARY While demand forecasts will never be exact, the dramatic increase in the kinds of data available to HR planners today offers the potential to increase the precision (and com- plexity) of quantitative demand models. In this chapter, we examined various quan- titative, qualitative, and blended techniques that organizations use to forecast future requirements for HR demand. Qualitative methods range from a single manager’s esti- mate to methods that challenge current assumptions like scenario planning, to models that increase the validity and reliability of expert judgments such as Delphi technique and nominal group technique. Delphi and NGT are versatile methods that can also be used to help groups brainstorm or achieve consensus. HR practitioners should consider using these methods not only for planning but also to gather the kinds of information that could otherwise be collected using focus groups or surveys.

Demand forecasts are imperfect. HR planners must understand the assumptions that form the basis of their forecasts and the sensitivity of the forecast to deviations from these assumptions. Ideally, deviations from the forecast can be managed by HR practices such as flexible work arrangements, part-time workers, contract workers etc. However, when the assumptions are incorrect by a significant amount, contingency forecasts and plans must be put in place. Good planning involves the development of contingency plans, the ability to detect as early as possible when the current forecast can no longer satisfy actual demand using current HR practices, and when a contingency plan must be put into action.

KEY TERMS Delphi technique p. 121 HR budgets p. 124 nominal group technique (NGT) p. 123 ratio analysis p. 106 regression analysis p. 109 scenario planning p. 119 simulation p. 127 staffing table p. 125 structural equation modelling (SEM) p. 117 trend analysis p. 106

DISCUSSION QUESTIONS 1. Imagine that you have a friend who owns and runs a family restaurant that special-

izes in plant-based whole foods. At capacity, the restaurant requires four wait staff to wait on all the tables. While the restaurant has been getting busier and busier, your friend has found it challenging to have the right number of wait staff working. Sometimes when only one person is working, he or she is overwhelmed, and other times the three or four people working stare into a mostly empty restaurant. When staff aren’t working, the restaurant is losing money, and the wait staff aren’t earning tips. Without a full income from waiting tables, the better wait staff move to busier jobs, so the quality of workers is suffering from this poor scheduling. Using what

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130 NELStrategic Human Resources Planning

you know about forecasting demand, what advice would you offer to solve this scheduling issue?

2. The Delphi technique and the nominal group technique (NGT) are often used to facilitate creative and innovative solutions to HR demand issues. What are the similarities and differences between the two methods? List the conditions associated with successful employment of each of these two demand forecasting techniques.

3. Ratio or trend analysis can be a very effective method for determining HR demand. Identify a wide variety of relevant indices that can be used for this demand-fore- casting technique in different organizational contexts, including public not-for-profit organizations, as well as in diverse industrial settings in the private sector.

EXERCISE: SCENARIO PLANNING The question: Will undergraduate university courses in Canada move more toward online course offerings in the next five years, or will there be a gradual reduction in online courses?

a. On your own, or in groups of 4–5 people, write down all the factors that you can think of that might influence the move toward increasing or decreasing the use of online courses. Write each factor on a separate sticky note. Think of how political, economic, environmental, social, technological, demographic, and legal/regulatory issues could influence the move toward or away from online courses over the next five years. Write each factor down as you think of it, and do not critically examine the factors yet.

b. Look at your factors, and move the sticky notes into groups of factors that form natural clusters. Give each cluster a title.

c. Select the two clusters that you think have the potential to have the most impact on the decision to increase online course offerings and that are also unpredictable.

d. Now stretch these two clusters out. Place the two extremes of the first cluster at either end of the horizontal axis, and the two extremes of the second cluster at each end of the vertical axis. This will leave you with four quadrants: the top right quadrant will represent a world in which both clusters are at the extreme positive end of their scales. The bottom right quadrant will represent a world in which the horizontally placed cluster is at the top end of its scale, but the vertically placed cluster is at the negative end of its scale, and so on.

e. Look at the world that is represented by each quadrant, and describe what each world would be like. How does online education fit into this world? Give each world its own representative name.

f. Describe the types of strategies, resources, and activities that would be neces- sary for a university course to be successful in each of these worlds.

g. Look at the strategies, resources, and activities that are common to all four worlds. Any attributes that are common to all four worlds are likely to lead to success in any outcome that is close to what your scenario planning model presents. Therefore, these are the attributes that universities should

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131CHAPTER 5 Determining HR Demand NEL

be focusing on today so that they can be successful in presenting strong pro- grams and class environments to students in the near future.

h. Discuss your findings with other groups or individuals. How are they similar, and how do they differ? What were the critical differences in your assump- tions that affected the outcomes?

CASE STUDY ONTARIO POWER GENERATION

Ontario Power Generation is a very large North American power company, with a generating capacity of more than 16 000 megawatts. OPG provides power to more than half of all Ontario homes and businesses. With just over 10 000 employees, OPG produces electricity using a combination of hydroelectric, thermal, nuclear, biomass, and wind-powered stations. Roughly 95 percent of the power produced by OPG in 2013 came from hydroelectric and nuclear sources, which produce zero emissions that contribute to smog and climate change.

The power-producing industry is characterized as having fairly stable demand, although the regulatory and social environment in which power companies operate is going through a period of change. For example, OPG is ahead of the Ontario Ministry of Energy–mandated schedule to close its coal-fired generating stations. These stations have been shuttered, but not sold, and may one day be converted to natural gas–fired stations. OPG’s Pickering nuclear power stations will be shut down by 2020, while phasing in greater use of wind, solar, bio-energy, and hydroelectric power over roughly the same period.

Consumer demand for power is dynamic, with daily, weekly, and monthly peaks, as well as seasonal differences in demand. OPG must anticipate power demand and determine how to satisfy its total power demand with power from different stations. Each type of power station has its own unique operating require- ments for technicians, and so the HR demand for technicians depends not only on total power needs, but also the mix of power stations in use at any given time. Because the company has varying skill requirements for its technicians, OPG seeks to hire technicians with the basic engineering skills qualifications, and then provides extensive training. The training period lasts up to five years, which indicates how strategically important technicians are to OPG. The forecasting of demand for technicians must account for these cyclical differences in power demand in order to prevent over- or understaffing. In addition to these demand requirements, the utility must plan for future requirements given the expected growth in the demand for electricity over time, and its own strategic initiative to reduce total full-time employment levels by roughly 20 percent from its 2011 levels over a five-year period.

Organizational planners have many years of prior sales and consumption data from which to draw forecasts. The utility also has a management team that has deep knowledge of the regulatory and political landscape, the energy sector in general, and the electricity market in the province. Other attributes that may influence the demand for energy and therefore the demand for technicians include the extent to which third-party (consultant) services are utilized, the total capital budget of the company, the total number of kilowatt hours generated, the kilowatt hours produced by each station, the type of power stations available for use, and sales revenues.

(continued )

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132 NELStrategic Human Resources Planning

QUESTIONS

1. Assuming that OPG wishes to improve its HR demand forecasts for technicians over a three-year period, do you think that OPG should use a quantitative or qualitative type of model to assess its demand for technicians?

2. What specific form of quantitative or qualitative model do you think OPG should use?

Sources: OPG Annual Report 2013; OPG employment website; Meehan, R.H., and Ahmed, S.B. (1990).

// REFERENCES 1. Elbo, R. November 15, 2000. “In the Workplace: Competing with Poaching

Employers.” Businessworld, 1–3; Cascio, W.F. 1991. Applied Psychology in Personnel Management (4th ed.). Englewood Cliffs, NJ: Prentice Hall; Ward, D. 1996. “Workforce Demand Forecasting Techniques.” Human Resource Planning, Vol. 19, No. 1: 54–55.

2. Al-Harbi, K. 2000. “Optimization of Staff Numbers in the Process Indus- tries: An Application of DEA.” International Journal of Manpower, Vol. 21, No. 1: 47–55; Meehan, R., and B.S. Ahmed. 1990. “Forecasting Human Resources Requirements: A Demand Model.” Human Resource Planning, Vol. 13, No. 4: 297–307.

3. Positive and negative distances from the line can cancel one another out. Regression therefore squares the distances from the line so that all distances are positive.

4. Meehan, R.H., and S.B. Ahmed. 1990. 5. When comparing the relative strength of predictors that are based in different

units of measurement, it is best to standardize the predictors. 6. Ward. 1996. 7. Cooper, J., and S. Jackson. 2017. Workforce Planning Practices in Canada:

Human Resources Trends and Metrics (4th ed.). The Conference Board of Canada.

8. Tetlock, P. 2005. Expert Political Judgment: How Good Is It? How Can We Know? New Jersey: Princeton University Press.

9. Surowiecki, J. 2005. The Wisdom of Crowds. Toronto: Random House. 10. Anonymous. 2005. “Tool Forecasts Labour Needs.” On-Site, Vol. 49, No.

6: 10–11; Gatewood, R.D., and E.J. Gatewood. 1983. “The Use of Expert Data in Human Resource Planning: Guidelines from Strategic Forecasting.” Human Resource Planning, Vol. 6, No. 2 (June): 83–94.

11. Korte, R.F., and T.J. Chermack. 2006. “Changing Organizational Culture with Scenario Planning.” Futures, Vol. 39: 645–656.

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12. Passmore, D., E. Cebeci, and R. Baker. 2005. “Market-based Information for Decision Support in Human Resource Development.” Human Resource Development Review, Vol. 4, No. 1: 33–49; Luthans, F. 1992. Organizational Behavior (6th ed.). New York: McGraw-Hill.

13. Helmer, O., cited in Bramwell, L., and E. Hykawy. 1999. “The Delphi Tech- nique: A Possible Tool for Predicting Future Events in Nursing Education.” Canadian Journal of Nursing Research, Vol. 30, No. 4: 47–58.

14. Passmore et al. 2005; Fusfeld, A.R., and R.N. Foster. 1971. “The Delphi Technique: Survey and Comment.” Business Horizons, Vol. 14, No. 3 (June): 63–74.

15. Loo, R., and K. Thorpe. 2003. “A Delphi Study Forecasting Management Training and Development for First-Line Nurse Managers.” The Journal of Management Development, Vol. 22, No. 9: 10, 824–825; Hampton, D.R., C.E. Summer, and R.A. Webber. 1987. Organizational Behavior and the Prac- tice of Management (5th ed.). Glenview, IL: Scott Foresman; Milkovich, G., A. Annoni, and T. Mahoney. 1972. “The Use of Delphi Procedures in Manpower Forecasting.” Management Science, Vol. 19, No. 4 (December): 381–388; Milkovich, G.T., and T.A. Mahoney. 1978. “Human Resource Plan- ning Models: A Perspective.” Human Resource Planning, Vol. 1, No. 1 (1978): 19–30.

16. Bramwell, L., and E. Hykawy. 1999. “The Delphi Technique: A Possible Tool for Predicting Future Events in Nursing Education.” Canadian Journal of Nursing Research, Vol. 30, No. 4: 47–58.

17. Loo, R., and K. Thorpe. 2004. “Making Female First-Line Nurse Managers More Effective: A Delphi Study of Occupational Stress.” Women in Manage- ment Review, Bradford, Vol. 19, No. 1/2; Chan, C., and K. McBey et al. 2004. “Nursing Crisis: Retention Strategies for Hospital Administrators.” Research and Practice in Human Resource Management, Vol. 12, No. 2: 31–56; Meehan and Ahmed. 1990.

18. Bramwell and Hykawym. 1999. 19. Sobaih, E.E., C. Ritchie, and E. Jones. 2012. “Consulting the Oracle? Appli-

cations of Modified Delphi Technique to Qualitative Research in the Hospi- tality Industry.” International Journal of Contemporary Hospitality Management, Vol. 24, No. 6: 886–906.

20. Fraser, C., and A. Fraser. 2000. “Measuring the Performance of Retail Man- agers in Australia and Singapore.” International Journal of Retail & Distribution Management, Vol. 28, No. 6: 228–243; Van de Ven, A.H. 1974. Group Deci- sion-making Effectiveness. Kent, OH: Kent State University Center for Business and Economic Research Press.

21. Rohrbaugh, J. 1981. “Improving the Quality of Group Judgement: Social Judgement Analysis and the Nominal Group Technique.” Organizational Behavior and Human Performance (October): 272–288.

22. Fraser, C. 2000. “The Influence of Personal Characteristics on Effectiveness of Construction Site Managers.” Construction Management & Economics, Vol. 18, No. 1: 29–36; Delbecq, A.L., A.H. Van de Ven, and D.H. Gustafson.

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1975. Group Techniques for Program Planning. Glenview, IL: Scott Foresman; Green, T.B. 1975. “An Empirical Analysis of Nominal and Interacting Groups.” Academy of Management Journal (March): 63–73.

23. Roeden, J.M., M.A. Maaskant, and L.M. Curfs. 2012. “The Nominal Group Technique as an Evaluation Tool for Solution-focused Coaching.” Journal of Applied Research in Intellectual Disabilities, Vol. 25: 588–593.

24. McBeath, G. 1992. The Handbook of Human Resource Planning: Practical Manpower Analysis Techniques for HR Professionals. Oxford: Blackwell.

25. Grossler, A., and A. Zock. 2010. Supporting Long-Term Workforce Plan- ning with a Dynamic Aging Chain Model: A Case Study from the Service Industry. Human Resource Management, Vol. 49: 829–848.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand the relationship between demand and supply forecasting techniques in the HR planning process.

• Recognize the importance of effectively managing the supply of human capital. • Comprehend the importance of segmenting human capital to better understand

where human capital plays a critical role in implementing strategy and how to manage the supply of that human capital.

• Discuss and evaluate the advantages and disadvantages of the following specific methods of determining external and internal supply: a. Skills and management inventories b. Human capital segmentation c. Markov models d. Linear programming and simulation e. Movement analysis f. Vacancy/renewal models

• Recognize when an HR gap may be filled through substitution strategies such as automation, or when the gap may be attributable mostly to the bullwhip effect.

ASCERTAINING HR SUPPLY

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NEL136 Strategic Human Resources Planning

// INTRODUCTION In the preceding chapter, we examined a variety of methods used to forecast HR demand. Many of these procedures (e.g., trend analysis, simulation, the Delphi technique, and NGT) can also be used to determine the supply of human capital.

Human capital must be obtained from a source that is either internal to the orga- nization (current employees) or external (individuals currently not employed by the organization), or, more commonly, some combination of these. Many organizations give preference to internal supply, because selecting these individuals for training and devel- opment, and subsequent promotion, enables the organization to reinforce employee loyalty and performance. Other reasons for giving preferential consideration to your own workforce to fill job openings include the following:

1. Current employees are already socialized to the norms, rules, and procedures of your organization, and so organizational fit is ensured.

2. The employer possesses detailed knowledge (as listed on its HRMS skill inventories) of the employees’ performance and KSAs over time (e.g., work history and experience).

3. Internal labour markets provide employees some protection from economic downturns, as employees can move from one job type to others.

Internal supply Existing employees who can be retrained, pro- moted, transferred, or otherwise redeployed to fill anticipated future HR requirements External supply Members of the work- force not currently employed by the firm, who are currently undergoing training, working for competitors, members of unions or professional associa- tions, in a transitional stage, between jobs, or unemployed

Economists who analyze labour supply will often look at unemployment rates by province, by occupation, and by designated group. These numbers give them an idea of where potential supplies of labour exist. Canada’s Aboriginal population is the fastest growing population in Canada, which means it is a potential source of labour now and in the decades to follow. However, in 2006 Aboriginal people had an unemployment rate of nearly 15 percent compared to about 6 percent in the general population. This high rate of unemployment is due to particularly low levels of education and a younger demographic. And yet, nearly 80 percent of employers believe that the employment of Aboriginal people is necessary to deal with labour shortages.

What can employers do to attract and retain this pool of labour? PTI Group worked with Aboriginal communities in Alberta to identify barriers to employment. One barrier was the lack of transportation, which PTI solved by providing buses to drive employees between the reserves and the

work sites. PTI also created a training program at the camp, consisting of classes and practical experience. All the trainees in the first cohort are now employed by the company.

To address problems of low literacy, lack of work experience, and weak technical skills, employers such as Alberta-Pacific Forest Industries offer job placement and apprenticeship programs that provide practical training and mentorships. Retention of this demographic is aided by workplace programs such as extended leaves during the traditional hunting season. All employees take a cultural training program, Aboriginal 101, to decrease stereotyping and racism on the job. Al-Pac states that these programs work and reports a very low 5 percent turnover among this group.

Sources: Aboriginal Peoples in Canada, Designated Group Profiles 2006: www.labour.gc.ca/eng/standards: Retrieved 29/07/2014; Silliker,!A.

“Aboriginals key to tackling labour shortage” Canadian HR Reporter, 25, 19, Nov 5, 2012, p. 11; and Klie, S. “Aboriginals a strategic

imperative,” Canadian HR Reporter, 24, 8, April 25, 2011, pp. 1, 8.

ABORIGINAL PEOPLE: A GROWING LABOUR SOURCE

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NEL 137CHAPTER 6 Ascertaining HR Supply

// SEGMENTING THE INTERNAL SUPPLY OF HUMAN CAPITAL With the popularity of news headlines focusing on the skills gap for highly skilled workers, and the forecasted labour shortage issues in Canada in the coming decade, it is clear that organizations can benefit from placing increased importance on the man- agement and internal supply of human capital. What this implies is that rather than focusing solely on recruitment when a need is identified, firms should start looking at the kinds of human capital skills or competencies that are critical to solving organizational problems or that are key to implementing the firm’s strategy, and implement policies that aim to retain and develop these critical skills.

However, employees working in the same job, who hold similar sets of skills, may have very different objectives when it comes to how the current job fits into their own career objectives. When different groups of employees work in the same job but have different work or career preferences, it may be possible to retain or develop more than one of these employee segments with HR programs. Consider a salesperson working on the floor at one of the major clothing sales chains such as The Gap, or J. Crew. Some of these employees are there for the long haul; they love the company, its products, its values, and the experience that it provides for its customers. These employees would love to work for the company for as long as they can imagine, and possibly even manage their own store one day, or buy their own franchise. But there are several other segments of employees working the floor as well. Some employees are using the job to help pay their way through school, and intend to move into a different field once they graduate. Other employees don’t want a full-time job, and enjoy the casual nature of their work as well as the opportunity to be flexible with the number of hours they work per week and when they work those hours. Still other employees might be retired, and are looking for part-time work that provides a social experience and the opportunity to be active. Each of these groups of employees can be segmented based on its unique combinations of preferences for the employment contract at the firm. All these employee segments add value to the firm, and excellent workers can be found in all segments. However, if the company is recruiting for, selecting, providing benefits, and rewarding only the segment that strongly identifies with the firm for the long haul, then it is ignoring the needs and desires of all the other existing human capital segments. If the firm only hired sales staff from the long haul segment who want to work full time and progress through the company, then it is creating a host of unforeseen problems relating to finding people to work part-time or odd hours, and career development problems, as there is no way to provide developmental opportunities and career progress for all the sales staff.

John Boudreau suggests that firms should understand each of the employee segments that comprise their human capital contingent, and provide HR practices that appeal to each of these segments in unique ways.1 That way firms can influence the supply of human capital from each of these segments in ways that ensure a strong supply of human capital. Boudreau proposes three questions to understand and influence supply:

1. What are the critical human capital segments?2 In order to answer this question HR practitioners must have a clear understanding of the organizational activi- ties that bring value to the customer. These activities are what the firm does to differentiate itself in the market, and the employees who are involved in

Employee segmentation The grouping of employees based on characteristics that are relevant to the employee experience such as career prefer- ences, demographics, work—life prefer- ences, or benefits

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NEL138 Strategic Human Resources Planning

the performance of those activities and the delivery of that value are critical to firm success. HR planners should determine the most relevant attributes to use as a basis for segmenting critical human capital; these attributes could take many forms, including differences in preferences for benefits, flexible work options, or differences in reasons for working at the firm. Knowing how to appeal to different segments of critical human capital will lead to a stronger applicant pool and help the firm design policies that appeal to each employee segment as needed. The second question that Boudreau proposes that firms ask in order to influence the supply of its human capital is

2. What response do we need from each of these segments?3 Let’s take for example a firm that expects the demand for HR managers to increase along with expected organizational growth. After graduating from college or university, it might take an HR professional five years or more working within the HR function to develop the skills to become an HR manager. Another path to becoming an HR manager in the firm might be to work for five years within one of the business lines of the firm, formalize one’s HR knowledge in an HR-focused Master’s degree program, and then move into the HR manager role. This path might take five to seven years. By segmenting these human capital requirements by demographics, the firm can understand how to influ- ence the supply of HR managers over the next decade by determining what proportion of existing HR managers may be considering retirement, how many recent graduates are entering the HR function, and what proportion of HR managers are coming from the business lines with an advanced HR degree.

With an estimate of demand for HR managers, the firm can model whether and how to meet that demand from internal sources. For example, if policies were put in place to persuade 25 percent of HR managers who are contemplating retirement to remain in the job for an extra two to five years, and if policies were used to increase the proportion of millennials in the applicant pool by 10 percent, and if managers outside the HR function who were interested in working in HR were offered a subsidy to help pay for an advanced HR degree part-time while working, how would the supply of HR managers change over the next five years? The final question to ask when considering how to influence the supply of human capital is

3. What features of the employment deal create the best response at the lowest cost?4 Looking at our example of influencing the supply of HR managers by segmenting along demographics, we see that there are different costs associated with each of our options. We should include among those options external hiring, where we seek to hire candidates who already possess all the skills or competencies needed to fill the HR manager job. The costs associated with each of these options can be calculated, and the question becomes a relatively simple optimization problem of reducing the risk of running low on HR managers by combining our options to arrive at the lowest cost and lowest risk solution.

While the HR manager job was segmented by demographic, the salesperson job at the clothing store discussed earlier was segmented by other features of the employ- ment contract. By segmenting along preferences for organizational identification and commitment, the clothing store can optimize its supply of full-time, part-time, and

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occasional workers to balance scheduling needs. Segmenting workers along unique sets of attributes that make the employment contract attractive in order to influence the supply of human capital allows forecasters to better understand and model how to influence the supply of each employee segment. Policies such as recruitment and retention strategies that appeal to these unique segments provide the means through which planners can influence the supply of human capital.

When firms do not have the policies in place or the resources to provide an adequate supply of human capital from within, adequate supply must be found outside the firm. When supply is inadequate, the result could be due to a labour shortage, where there simply are not enough workers for the number of jobs available, or due to a skills gap, where there are insufficient numbers of workers who possess the skills necessary to perform the job (see HR Planning Today 6.1). We now turn to an examination of some of the mechanisms that influence the external supply of human capital.

Skills gap A situation in which the supply of a particular form of human capital available to the firm is inadequate to address the demand

HR PLANNING TODAY 6.1

WHAT ABOUT THE SKILLS GAP?

Canadian news stories about the skills gap lead us to believe that there is a shortage in the supply of high skilled Canadian labour. A 2016 survey for the Canadian Internet Registration Authority found that despite having competi- tive recruitment and selection practices, almost 50 percent of the IT companies surveyed claimed they had trouble filling IT positions in the last year. Few organizations have the capability to measure the cost of not hiring a worker for a year, and if they could, they might take stronger steps to avoid these kinds of gaps.

Are skills gaps real, and if so, what are the causes and cures? Some research suggests that the skills gap is limited to particular geographic regions or knowledge sectors. For example, the insurance industry lacks suffi- cient numbers of claims managers, claims handlers, and actuaries, and some skilled trades such as boilermakers, machinists, and heavy equipment handlers currently face a skills gap. However, for many jobs, research suggests that a large portion of the gap may be brought on by orga- nizations. Firms that do not have a development pipeline, that spend little on training, and that are dependent on external hiring for most skilled workers are especially at risk for not being able to hire adequate numbers. Another

contributing factor to an inflated gap is in the recruitment and hiring practices popular in firms today. Rather than selecting based on knowledge, skills, abilities, and apti- tudes derived from on job analysis, many firms prioritize work experience as a minimum qualification. When an organization is looking for an applicant with three to five years of experience in the job, how realistic is it to expect that an employee who has been working the same job but in another organization for three to five years will be willing to forego their firm-specific human capital to go work for roughly the same pay in a different organization? If firms want to pay the market rate or lower for an employee with several years of experience at the job, it is not surprising that the job advertisement yields an applicant pool that does not match its requirements.

Firms that want to avoid unfilled jobs over the long term need to align their strategic activities with their critical talent segments, and incorporate training, development, and retention strategies to reduce their need for external hiring. Firms need to appeal to their critical talent segments with HR practices that draw a larger applicant pool, and should consider paying above market wages for the talent segments that are critical to implementing firm strategy.

Sources: Adapted from Cappelli, P. (2012). Why good people can’t get jobs: The skills gap and what companies can do about it. Wharton Digital Press: Philadelphia; Anonymous, June 2016. “From broadband access to smart economies: Technology, skills and Canada’s future.” Canadian Internet Registration Authority; and https://cira.ca/sites/default/files/public/Broadband-Internet-access-across-Canada-en.pdf

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// HR SUPPLY PROGRAMS THE ROLE OF EMPLOYERS IN INFLUENCING SUPPLY If employers cannot find a sufficient supply of labour for certain jobs, they can either change the nature of the job, train workers themselves, or look at other labour pools. Jobs that are difficult to fill can be made more attractive. In one country, locals were unwilling to apply for construction jobs because they saw the work as dangerous, difficult, and dirty, in an unsafe and uncomfortable environment. Where possible, companies could try to either change the work conditions or change the perceptions of these jobs. Alter- natively, managers could train the types of workers that they need. For example, a group of manufacturers, the Ontario Manufacturing Learning Consortium, are hiring young unskilled people and training them (with both classroom and on-the-job experiences) for jobs such as machinists.5 However, Canadian organizations have a relatively poor track record in training employees, compared to other countries. According to a survey of executives in 27 countries, only 38 percent of Canadian businesses offer training to teach technical skills to employees in the highly desirable STEM areas (science, technology, engineering, and math), compared to 51 percent in the United States and even more in Columbia and Malaysia. According to Canadian executives, the problem is that they don’t know what skills the workforce will need to remain competitive in the near future.6

OTHER LABOUR POOLS This chapter opened with examples of companies hiring Aboriginal people in the work- force. Organizations facing shortages could make targeted efforts to recruit from the labour pools of the four designated groups, or other stigmatized groups. Home Depot Canada

Workers who have retired are a good source of labour particularly if the schedules are flexible.

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won an award for its positive programs for hiring and retaining mature workers. Only 8 percent of Canadian organizations had plans to hire retired workers (see HR Planning Today 6.2). Another employment source that has only recently begun to be utilized is the neurodiverse community. Neurodiversity refers to neurological differences that are recognized as natural human variation. These differences include descriptors such as autism, and Tourette syndrome.7 Organizations such as SAP have made commitments to increasing their hiring rate of neurodiverse individuals to reflect the observed repre- sentation in the population, which is around 1 percent.8 In order to hire neurodiverse individuals or members of any of Canada’s protected groups, best practices involve performing job analysis to understand all job-relevant attributes of the work, developing science-based selection practices that seek to reduce bias and control for other errors, and providing realistic job previews so that working conditions are well understood before- hand. Job analysis plays a critical role in removing bias in expectations around what is required to perform a job, and changing mental models around the general attributes necessary for the job or workplace that may persist and that do not hold any relation to actual job requirements.

INFLUENCE OF GOVERNMENT PROGRAMS Governments control the supply of labour in many ways. Provincial governments, for example, determine the number of places available in professional programs such as nursing, and trade apprenticeships, such as electricians. Working through their employer associations, organizations could lobby the government to increase the number of training programs or students. The government also plays a key role in determining the number of immigrants admitted to Canada. By increasing the spaces available to qualified professionals and tradespeople, the government can alleviate demand for these workers in targeted occupations. However, academics state that these are short-term solutions. While it seems sensible to increase the number of pipefitters and welders through government programs, what happens 20 years later when there are no jobs for these workers? This was the case for construction workers in Alberta (1982) and auto workers in Ontario. What is needed, they argue, is a flexible, adapt- able worker.9

HR PLANNING TODAY 6.2

ATTRACTING OLDER WORKERS

By 2030, roughly 23 percent of Canadians will be 65 years old or older. A survey of 1500 older workers (50 and over) revealed that older workers desire many of the same things that other workers rank as important:

1. Flexible working options 2. Training and development

3. Job design 4. Recognition and respect 5. Performance evaluation (especially one that is free

of age bias) 6. Compensation

Sources: Ben-Hur, S. “Viewpoint,” Training Journal, November 2012, pp. 8–9; Armstrong-Stassen, M., “Encouraging Retirees to Return to the Work- force,” Human Resource Planning, 29, 4 (2008), 38–44; and http://www.statcan.gc.ca/daily-quotidien/140917/dq140917a-eng.htm.

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NEL142 Strategic Human Resources Planning

But there is also a shortage of Canadians who are willing to do “hard” labour (such as working in the fields) or low-paying service jobs. For example, the 2011 Workplace Survey by Statistics Canada showed that there were 395,000 unfilled jobs, mostly in Ontario, Alberta, and Quebec.10 The Temporary Foreign Workers Program was intended to increase the number of immigrants to fill these types of jobs, but was stopped due to abuse by some employers.

HR RETENTION PROGRAMS Any presentation on HR supply would be incomplete without a discussion of the need for organizations to monitor and control levels of absenteeism and employee turnover. It may be helpful to think metaphorically of the organization’s supply of employees as the level of water in a bathtub. Even with the water taps fully open and water pouring into the tub, if the drain plug is not in place, inevitably we will soon be looking at an empty tub! Organizationally, even if we are highly successful in recruiting a large number of highly skilled applicants (a situation that is increasingly rare for most organizations, given demographic and competitive factors), if we are unable to retain experienced, high-performing employees, we face dire consequences, not only in the short run in failing to achieve desired organizational goals but also, perhaps even more critically, in an inadequate HR supply and lost opportunities for future succession. Apart from normal levels of retirement and voluntary turnover, high levels of involuntary turnover normally signify a mismatch between the individual and the organization.11 Attention should be paid to selection procedures to ensure that proper skills and competencies are possessed by the individual, as well as to orientation and training and development in ensuring that employees are provided with clear guidance with regard to their employ- ment and desired performance levels.

With labour shortages projected for the next decade, retention programs are no longer an option for most North American companies; they are fast turning into a key requirement for organizational survival.12 The costs of replacing current workers and acquiring new ones can be staggering. Apart from “hard” costs (e.g., advertisements, head- hunter and recruiting fees, interview training and travel costs, administration expenses, cost of lost production, bonuses or increased salaries to act as inducements to join, and so on), there are also the “softer” elements (such as lost business and customer con- tacts, decreased quantity or quality of work due to training and “learning curve” gaps, orientation and training time, decline in team morale and productivity, and increased turnover due to the “follow me” effect) to consider. It is estimated that the cost of replacing a trained worker ranges from 70 to 200 percent of the departing person’s annual salary.13 Organizations that demonstrate flexibility and a genuine effort to assist their employees are perceived to be more attractive places to work (see HR Planning Today 6.3 for an example of how one company seeks to avoid lay-offs). Retention can be greatly facilitated by offering effective communication programs; maintaining an enjoyable and collegial work atmosphere; designing meaningful jobs; formulating and administering performance and compensation systems that identify and differentially reward better performers based on clearly communicated criteria; and offering more flexible and attractive work arrangements (e.g., flextime, telecommuting, cafeteria-style benefit plans). Mentoring programs have also been found to be highly effective for retention through positively influencing individual commitment and potential for career success, and thereby reducing turnover intentions.14 The need is clear, as is the fact that

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human capital is a source of competitive advantage that makes the difference between organizational success or failure.15

Organizations are beginning to apply operations and marketing principles by seg- menting human capital according to sets of desirable employment attributes. In the same way that firms have applied ideas such as fast response and mass customization to consumer products, so too are firms looking at mass customizing the HR experi- ence based on human capital talent segments. Mass customization can be seen every day in products like the Apple Watch, where Apple has gathered market intelligence to determine that customers tend to care about some combination of watch face size, watch material, strap material, strap colour, and price. Customers looking to buy an Apple Watch can select any combination of attributes they desire and build their own unique Watch that suits their personal preferences. Mass customization in HR refers to the way in which the major attributes that influence the employee relationship with the firm can be blended and moulded to suit the individual needs of the employee. Not only offering policies such as flexible work arrangements, core working hours, telecommuting, cafeteria-style benefits, but allowing employees the individual freedom to select how to receive these policies, and even the option to select the mix of fixed and incentive pay all contribute to mass customizing the employment experience. Mass customization of HR is intended to help maximize the employee experience and ultimately enhance retention. Organizations are increasingly facing HR supply and retention problems, which will prove increasingly costly given looming demographic shortages in the labour force. (See HR Planning Notebook 6.1 for more recommenda- tions for retaining employees.)16

Mass customization in HR The ability to customize HR practices at the employee level effi- ciently and at low cost

HR PLANNING TODAY 6.3

RETENTION OF HIGHLY SKILLED WORKERS

Some sectors, such as construction, experience cycles of high demand followed by low market demand for products. The typical policy of companies in these sectors is to lay off workers during the slump, and hope to rehire them when demand resumes. However, experience has shown that some of these workers become discouraged and find other jobs. If they were easy to replace, this would not be a problem. But some of these workers are highly skilled, such as mechanics, with five years of apprenticeship and experi- ence forging them into productive employees. Companies also find that during, for example, a nine-month layoff, employees’ skills begin to deteriorate and they must be retrained upon their return to work. So, what is the solution?

Hitachi Construction Truck Manufacturing in Guelph, Ontario, thinks it knows. This company manufactures large trucks used in mining and employs about 200 people in manufacturing and another 180 in the office. The company wants to institute a no-layoff policy and keep their skilled workers employed during slumps. Toyota has the same policy for its workforce in America and plans, during a 14-week layoff, to keep workers and assign them to training and other activities at a cost of $50 million. Recognizing the cost of a no-layoff policy, Hitachi has asked for financial help from the government.

Sources: http://lawofwork.ca/?p=149; Keenan, G. “For Hitachi, Keeping Skilled Workers Is Key,” The Globe and Mail, September 8, 2014, B7; and http://www.guelphtribune.ca/news/hitachi-big-on-future-in-guelph, retrieved October 23, 2014.

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HR PLANNING NOTEBOOK 6.1

RECOMMENDATIONS FOR RETAINING EMPLOYEES

Organizations cannot afford to lose experienced, talented employees. Given that highly qualified, high-performing staff will always have alternative employment options, what are some of the steps organizations can take to help attract and retain talented employees? The following rec- ommendations are drawn from the research literature:

1. Train managers in strategies for the retention of employees, and hold them accountable for retention.

2. Pay is not the main reason for losing talent. Pay atten- tion to “toxic” bosses and co-workers, bad manage- ment practices, and a lack of autonomy and respect at work.

3. Implement flexible working arrangements to facili- tate work–life balance (e.g., flexible work hours, compressed workweek, telecommuting, job sharing, daycare centres, and so on).

4. Reward fairly, consistently, and differentially on the basis of performance and results. Give recognition to employee preferences for different types of work ben- efits (time off, nonmonetary rewards such as travel or goods, tuition assistance, pension plans, life insur- ance, and so on).

5. Hold regular feedback and career development dis- cussions with your employees.

6. Recognize that talented, highly motivated employees do not view training as a discretionary item that should get cut during the first round of annual budget reviews!

7. Deal with “slackers” and underperformers! Talented employees resent being burdened with additional stress and workload.

8. Reward organizational seniority in addition to rewarding performance.

9. Identify “high turnover risk” occupations, classifica- tions, and personnel, and develop appropriate talent retention strategies.

10. Develop a managerial academy to teach talented employees the technical and interpersonal skills necessary to assume higher managerial positions in the future.

11. Review and pare to a minimum the following potential “dissatisfiers”: rules, regulations, micromanagement, policy manuals, meetings, and so on.

12. Take action on talent management; don’t just meet, discuss, or prepare a report.

Employee retention will soon become the number-one priority for HR professionals.

Sources: Adapted from F. Frank and C. Taylor, “Talent Management: Trends That Will Shape the Future,” Human Resource Planning, Vol. 27, No. 1 (2004): 33–42; J. Greenwald, “Benefits Programs Aim to Keep More Moms in the (Work) Family,” Business Insurance, Vol. 38, No. 5 (2004); “The Return of Work/Life Plans,” HR Focus, Vol. 81, No. 4 (2004); K. Hilton and J. Soubik, “Case Study: Pennsylvania’s Changing Workforce: Planning Today with Tomorrow’s Vision,” Public Personnel Management, Vol. 33, No. 4 (2004): 459–474; C. Trank, S. Rynes, and R. Bretz, “Attracting Applicants in the War for Talent: Differences in Work Preferences Among High Achievers,” Journal of Business and Psychology, Vol. 16, No. 3 (2002): 331–345; M. Hay, “Strategies for Survival in the War of Talent,” Career Development International, Vol. 7, No. 1 (2002): 52–56; and S. Langan, “Finding the Needle in the Haystack: The Challenge of Recruiting and Retaining Sharp Employees,” Public Personnel Management, Vol. 49, No. 4 (2000): 461–478.

// METHODS FOR MODELLING THE SUPPLY OF!HUMAN CAPITAL SKILLS AND MANAGEMENT INVENTORIES The first step in supply analysis is an examination of the number and capabilities of cur- rent employees. Skill inventories and management inventories contain information on the capabilities of your employees.17 A skills inventory is an individualized record held

Skills inventory An individualized personnel record held on each employee except those currently in management or professional positions

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on each employee except those currently in management or professional positions. Typi- cally, a skills inventory contains information for each individual on the following areas:

1. Personal information (e.g., name, employee number, job classification and compensation band, emergency notification, and telephone number)

2. Education, training, and skill competencies (e.g., certificates, licenses, and diplomas or degrees completed, including the area of specialization, dates of attendance, and names of the institutions attended)

3. Work history (e.g., date of hire, seniority, current job and supervisor, and previous jobs held in the organization and the dates associated with them)

4. Performance ratings (i.e., a numerical score of the employee’s history of performance in jobs in the organization)

5. Career information (e.g., future jobs desired by employee and those recom- mended by supervisors)

6. Hobbies and interests (including community and volunteer associations), and willingness to relocate.18

This skills inventory record is entered into an organization’s HRMS database and can be searched when looking for people with the skills and competencies required by a specific job. For this reason, skills inventories must be kept current, and employees should be given frequent opportunities to update or correct their personal entries; other- wise, an employee may not be considered for a job that he or she could fill successfully.

Management inventories can be considered to be enhanced skills inventories, because they contain all the above information and the following:

1. A history of management or professional jobs held 2. A record of management or professional training courses and dates of

completion 3. Key accountabilities for the current job (i.e., organizational resources,

including the size of the budget controlled, number of subordinates, important organizational outcomes for which the incumbent is primarily responsible)

4. Assessment centre and appraisal data 5. Professional and industry association memberships

Only when an organization has a properly maintained HRMS, complete with the skills and management inventories described above, is it really able to assess correctly the numbers and competency levels of its current workforce. In this way, HR planners can determine the organization’s workforce strengths and weaknesses and plan training and development courses accordingly, while noting which job openings must be filled from external sources because current employees lack the skill competencies required.

MARKOV MODELS Markov models are the most popular technique used for contemporary supply-side HR planning applications in medium to large organizations.19 Organizational size is a factor in the decision to use Markov modelling because the process involves estimating the probability of moving from one job to another. Estimates of employee movement

Management inventory An individualized personnel record for managerial, profes- sional, or technical personnel that includes all elements in the skills inventory with the addition of information on specialized duties, responsibilities, and accountabilities

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NEL146 Strategic Human Resources Planning

can become highly unreliable in small firms. These models are widely used in both educational and human capital planning processes.20 Furthermore, they have been found to be most useful in stable work environments where career paths are better defined. A Markov model, also referred to as a probabilistic (using probabilities of various movement options) or stochastic model,21 determines the pattern of employee movement throughout an organization’s system of jobs using a set of mutually exclusive states for movement into or out of a particular job.22 Markov analysis produces a series of matrices that detail the various patterns of movement to and from the wide variety of jobs in the organization. As such, they provide a method to model the flow of human capital between jobs within the organization to give a deeper understanding of how employee movement affects the supply of human capital beyond a simple estimate of turnover rates. When considering employee movement patterns in the organization, there are five mutually exclusive states in which an employee can reside:

1. Remaining in the current job 2. Promotion to a higher classified job 3. A lateral transfer to a job with a similar classification level 4. Exit from the job (e.g., termination, layoff, voluntary leaving by the

employee) 5. Demotion (which is relatively rare)23

Markov models do not examine individual employees but instead examine overall rates of movement between various job levels, and this movement between jobs is based on historical movement patterns.24 It is normally assumed, for calculation purposes, that the pattern of employee movement is relatively stable over time. If this is not the case, then adjustments have to be made to the historical data to allow them to be used for HR planning in the present day. Markov model data should be based upon movement during “typical” business operations. However, if environmental conditions change dra- matically, the information should be adjusted, using the HR planner’s best judgment. It is important to note that Markov techniques depend on stable transition probabilities, so dynamic and unstable environmental scenarios may preclude the effective usage of Markov models.25 See Table 6.1 for an example of a Markov Model.

There are three main steps to using a Markov model for HR planning purposes.26 First, collect historical data on mobility rates between jobs in the organization. An advantage to Markov models is that they do not need to be complicated. Many organi- zations collect data on turnover rate, promotion rate, and rates of lateral transfers and demotions. Second, based on these data, develop matrices to forecast future movement between jobs. Third, use the forecasts of the model to analyze HR policies and programs, and instigate the necessary adaptive measures.27

Let’s use the example Markov analysis in Table 6.1 to gain a better understanding of how the analysis works. The matrix shows five jobs over two time periods; the current state, which is shown as Time 1 and is represented by the first column of numbers; and the expected future state, which is shown as Time 2 and is represented by the remainder of the matrix. At Time 1, there are 100 kitchen staff, 150 servers, 50 hosts etc., for a total of 400 workers. The rows of the matrix represent the probability of movement from one job state to another from Time 1 to Time 2. The first row, which includes the transitional probabilities for kitchen staff shows that our historical expectation is that 40 percent of kitchen staff stay in their job from Time 1 to Time 2, while 10 percent of kitchen staff move to server jobs, 5 percent of kitchen staff transition to hosts, 15 percent of kitchen staff transition to food prep jobs, and 30 percent leave the organization. The numbers

Markov model A model that produces a series of matrices that detail the various patterns of movement to and from the various jobs in the organization

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below the percentage listings show the expected numbers of employees who will transi- tion from one job state to another. For example, of the 100 kitchen workers at Time 1, 40 percent, or 40 kitchen workers will remain in the job at Time 2. If we add the total number of employees down each column we can see the total number of workers for each job in Time 2. Looking at kitchen workers in Time 2, we expect that 40 will remain in the job, 15 will come from the server job, and 1.25 from the cook job, for a total of 56.25 kitchen workers expected at Time 2. This means that the supply of kitchen workers has gone down from 100 in Time 1 to 56 in Time 2, and the firm can look at its expected demand for kitchen workers in Time 2 to assess the degree to which 56 kitchen workers represents an expected shortfall. Looking along the columns to see the expected number of workers that will be in each job at Time 2, we can see that the cook job has gone from 25 cooks in Time 1 to 32.5 cooks at Time 2. This is a different kind of problem that sug- gests that the career path for food prep workers is leading to a surplus of cooks. Based on these Markov model results, we can develop HR policies and redesign jobs to overcome the gaps and surpluses that are apparent as a result of the Markov analysis.

By using employee movement data from the recent past, it is possible to calculate transitional probabilities, or the likelihood that an individual in a specific job will be promoted, terminated, moved laterally, be demoted, or stay in the job, normally one year into the future. The relevant period, or length of time between Time 1 and Time 2 is highly dependent on the speed at which movement occurs in the firm. If the period is too short, then too few transitions have occurred and the model does not reveal much of interest. If the period is too long, then too many transitions have occurred, and the model does not represent reality. By multiplying the total number of employees or positions in a particular job by the associated probabilities for each of the five possible movement scenarios, the HR planner derives numerical data on employee flow patterns throughout the organization, and between various job levels.

TABLE 6.1

MARKOV MODEL

TIME 1 TIME 2

KITCHEN SERVER HOST FOOD PREP COOK EXIT

KITCHEN 100 40% 40

10% 10

5% 5

15% 15

30% 30

SERVER 150 10% 15

60% 90

5% 7.5

25% 37.5

HOST 50 25% 12.5

60% 30

15% 7.5

FOOD PREP 75 10% 7.5

65% 48.75

20% 15

5% 3.75

COOK 25 5% 1.25

5% 1.25

70% 17.5

20% 5

TOTAL 400 56.25 121.25 42.5 63.75 32.5 83.75

Note: The probabilities (percentages) of various movement options are expressed horizontally and sum to 1 (100 percent).

Transitional probability The proportion of employees, or the number of employees who have historically resided in a given employment state divided by the total number of employees in the job. The transi- tional probability of ter- mination for a job that has 10 employees and historically has seen 2 leave every year is 2/10, or 20 percent

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NEL148 Strategic Human Resources Planning

The sequences of movements between various job states are referred to as Markov chains.28 (Markov chains are derived from the model and can be considered a subset of the model as they refer to movement sequences between specified job states, not the overall matrix). Detailed examination of the Markov model enables the determination of the number of external recruits required at various levels of the organizational hierarchy to fill openings caused by turnover, termination, promotion, and so on. The Markov model enables us to determine the specific number of replacements or successors required for any job family annually, as well as for specified future planning periods (based on normal attrition assumptions), which can help the HR function to be more proactive in its external recruitment programs. Additionally, we can calculate the chain of movement from an entry-level job all the way to the CEO appointment, along with forecast times of arrival, stay, and departure, in conjunction with breaks in career progression along the way. In fact, White refers to the length of a vacancy chain (the number of employees who will move as a result of having to replace one individual) as its multiplier effect, and his study of U.S. churches showed that for any one retiring minister, a chain of movement for five subsequent ministers was created.29 The length of an average chain is approximately three.30 Apart from its obvious appeal for the career planning of individuals who have upward aspirations in the organization,31 HR planners can use the derived information to plan when training and development courses, job rotations, and so on should be con- ducted for a specific group of employees, on the basis of predicted time to move from their current jobs to target jobs several levels higher in the organization’s hierarchy.32 Therefore, a Markov model has great value for determining the following:

1. The number of employees who move annually, and over specified time periods, between various job levels

2. The number of external hires that are required by the organization, and where the specific jobs are needed

3. The movement patterns and expected duration in specified jobs associated with patterns of career progression for employees in the organization (i.e., career paths)33

4. The number and percentage of all starters at a particular job level who will successfully attain a future target job level by a specified time period34

To summarize the process of Markov analysis, the planner would

1. Begin by determining the list of mutually exclusive states (promotion, transfer, termination, demotion, or status quo).

2. Develop a matrix of jobs that are linked by career progression or historical movement, based on the pattern of transitions between jobs.

3. Use historical data to determine the probability of moving from one state to another.

4. Populate the matrix with an initial distribution of job holders across the various states of the model.

All this information provides important insights in calculating the most appropriate balance between training and promoting internal employees on the one hand, and external recruiting on the other. For example, a Markov model of nurses in rural areas showed that salary increases and educational opportunities increased the number of nurses in these otherwise difficult to staff regions (see HR Planning Today 6.4).35 Markov models provide a relatively straightforward method for providing a snapshot of the flow of human capital, and for identifying gaps between the demand for human capital and its supply.

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NEL 149CHAPTER 6 Ascertaining HR Supply

LINEAR PROGRAMMING AND SIMULATION Linear programming is a mathematical procedure commonly used for project analysis in engineering and business applications. It has utility for HR planners because it allows us to determine the future supply of human capital based on achieving the best staffing outcome while taking into account certain constraints such as labour costs.36 Furthermore, conditions such as desired staffing ratios (e.g., the internal/external mix of employees) can be programmed into the equation for determining HR supply. The optimum or best supply-mix solution is provided by the model, and the best condi- tions obviously vary across organizations.37 Some companies may seek to minimize turnover or total labour costs, while others may seek to achieve an optimum level of staffing with respect to designated groups (e.g., visible minorities, women, Aboriginal

Linear programming A complex mathemat- ical procedure com- monly used for project analysis in engineering and business applica- tions; it can determine an optimum or best- supply mix solution to minimize costs or other constraints

HR PLANNING TODAY 6.4

USING MARKOV MODELS TO TEST EMPLOYEE MOVEMENT AND POLICY CHANGES

Markov models are often used to understand and predict the flow of jobs in an organization; but they can also be used to predict how jobs move at the industry level, and to test the effects of policy changes on employee movements. For example, the persistent shortage of professional health care workers such as nurses in rural areas is a problem in many countries, including South Africa. A Markov model was utilized in an attempt to understand what sorts of policies to implement in order to increase the number of nurses willing to serve in rural South African areas and to retain these nurses longer.

The Markov model was developed using roughly the same method outlined in this chapter. A set of assump- tions were developed by the planners that incorporate the various states nurses could occupy during their career. These states included working in (1) the rural sector, (2) the urban sector, (3) the private sector, (4) overseas, (5) a one-year specialty training course, and (6) departure from the profession. The time period that was reasonable to represent movement from one state to another was one year, and the researchers assumed that once nurses leave the profession, they do not return. The model itself exam- ined a typical career of 40 years, from age 25 to age 65.

The difficult part of this model is determining the tran- sitional probabilities of moving from one state to another. This involved making many assumptions about the work- force and combining those assumptions with observations

of past movements. The kinds of information that were gathered to assist in the assumptions around transitional probabilities included observations such as the knowledge that nurses typically specialize in the first 10 years of their career, that working conditions tend to be better in the private sector than in the public sector, and that working conditions are most difficult in rural areas.

The model was then run, making changes to assump- tions, and modelling policy interventions such as how movements would change if nurses working in rural condi- tions were provided with an additional allowance. Looking at a longer time frame enabled the researchers to model the short- and long-term effects of policy changes, and to model the effectiveness versus the costs of various policies over the long term. While the assumptions that are used to generate the transitional probabilities require more simplifying generalizations at the industry level, the method of generating a Markov model is very similar at the organizational level. Thus, Markov models can be used in organizations not just for modelling employee move- ments between related jobs, but also to model the effects of policy changes on those movements by incorporating the assumptions of what the policy changes should do to the transitional probabilities. After the policies are insti- tuted, HR professionals can track employee movements to observe the extent to which their assumptions were correct, and make further corrections if necessary.

Source: Adapted from Lagarde, M. & Cairns, J. (2012), “Modelling human resources policies with Markov models: An illustration with the South!African nursing labour market,” Health Care Management Science, 15, pp. 270–282.

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NEL150 Strategic Human Resources Planning

people, and people with disabilities) in all job levels throughout the organization.38 By providing the optimum level of human capital supply with respect to explicitly defined constraints or criteria, linear programming enables the calculation of what-if scenarios by changing or relaxing various model assumptions in order to determine the impact these changes will have on final numerical requirements for supply, both internal and external. To use linear programming, assumptions have to be similar to those used in regression analysis (discussed in Chapter 5), namely that the mathematical model has to contain variables that have linear relationships among the various constituent ele- ments. If this situation does not hold, then simulation models can be used. Simulation relaxes the requirement for linear relationships, but at the expense of greater depen- dency on the assumptions around the algorithms used to calculate the forecasts. The province of British Columbia used linear programming to determine the total number of students to admit to healthcare programs, the total number of nurses to train for management roles, and the total number to recruit from outside the region. The model incorporated variables such as learning and parental leaves, promotion rules, and rates and age.39 Complex mathematical models such as linear programming and simulation have distinct advantages; they can integrate a large number of variables from across the organization, they are excellent tools for testing what-if scenarios and the impact of assumptions on forecasts, and they can simultaneously forecast both demand and supply. However, as we will discuss in more detail in Chapter 8, the complexity of these models can make them difficult to understand and troubleshoot, even for the designers of the models.

MOVEMENT ANALYSIS Movement analysis is a technique used to analyze the chain or ripple effect that promo- tions or job losses have on the movements of other employees in an organization.40 The total number of people movements is always greater than or equal to the number of vacant positions to be filled. If relying solely on external hires, the number of vacant positions to be filled is exactly equal to the number of new hires obtained by the orga- nization, as there are no internal promotions of current employees to replace the losses. Conversely, if we rely heavily on current employees (i.e., internal supply) to fill position openings, the total number of movements will be greatly in excess of the number of open positions, because any one opening (e.g., due to a promotion or termination) will result in a chain of subordinates sequentially moving to fill the gaps (see HR Planning Notebook 6.2 for recommendations around how to manage internal labour markets).41 Movement analysis enables the HR planner to select the desired mix or percentage of internal and external supply for those positions requiring replacements, ranging from a promote-from-within policy to the other extreme of replacing losses entirely through external hiring.

Movement analysis can be performed for the organization as a whole, although analysts normally find it more useful to conduct separate analyses for each department, division, or functional area.42 The normal planning time horizon is one year, and starts with identifying the number of employees in each authority or compensation-band level at the start of the forecasting period. Next, we consider changes in the level of staffing for the department—that is, whether we are going to increase the number of jobs in some or all authority levels or downsize to reduce the total number of employees in the department. Having increased or decreased the employee requirement from that which was forecast at the start of the period, we now turn to calculating the

Movement analysis A technique used to analyze the chain or ripple effect that promo- tions or job losses have on the movements of employees

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NEL 151CHAPTER 6 Ascertaining HR Supply

losses requiring replacement for each authority level of the department. We are interested only in losses (e.g., because of promotions, transfers out of the department, voluntary turnover, termination) that need to be replaced; therefore, it is important that we not “double-count” positions that have already been incorporated into the staffing changes column! We add changes in staffing level to employee losses requiring replacement to give us the total number of positions requiring replacement. At this stage, having determined the total number of positions to be filled, the actual number of employee movements, as briefly described previously can vary widely, depending on our organization or department’s desired policy concerning the supply mix of internal and external replacements. HR Planning Notebook 6.3 provides information on the kinds of data that may be used to help determine whether to develop human capital internally or to hire from external sources.

Tables 6.2 and 6.3 demonstrate the assumptions and outcome of a movement analysis exercise. Table 6.2 shows the expected movement of employees at each job level in a work unit. At the beginning of the planning period, there are six jobs in job level five; by the end of the period this job level is increasing by another six positions, but three existing employees are expected to leave. Therefore, the total number of positions to be filled at this level is nine. Taking these total changes at each level to Table 6.3, we see that the changes made at each level are cumulative, so that 167 changes are required to accommodate the call for 68 positions to be filled.

HR PLANNING NOTEBOOK 6.2

MANAGING THE FIRM’S INTERNAL LABOUR MARKET: LESSONS FROM THE FIELD

Professors at Simon Fraser University’s Faculty of Business Administration have uncovered four lessons in properly using internal labour markets to supply the organization’s staffing requirements based on their study of a large man- ufacturing firm:

1. Managers should recognize that there are often mul- tiple internal labour markets typically operating in one firm.

2. Managers should conceptualize their staffing task as managing a system of human resource flows.

3. Managers need to develop an appreciation for the temporal and situational contexts within which staffing decisions are made.

4. Staffing decisions themselves can be appropriately viewed as garbage-can models (a classic model of decision making) in which multiple issues and mul- tiple criteria are typically invoked in matching indi- viduals and jobs.

Source: Adapted from L. Pinfield and V. Bushe, “Managing the Firm’s Internal Labour Market: Lessons from the Field,” Burnaby, BC: Faculty of Business Administration, Simon Fraser University. Paper presented at the Western Academy of Management Annual Meeting, Spokane (April 1992).

Most organizations have a policy of promoting from within except for entry-level positions.

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NEL152 Strategic Human Resources Planning

HR PLANNING NOTEBOOK 6.3

USING DATA TO DECIDE WHETHER TO DEVELOP INTERNALLY OR HIRE EXTERNALLY

The decision to make or buy the inputs necessary to pro- duce a product or service are based on factors such as the strategic importance of the input, and the strength that the supplier of the product has in capturing value. For example, television manufacturers tend to differen- tiate themselves on the basis of the quality of the picture their televisions produce. However, manufacturing the LCD panels in televisions is complicated and expensive, and the technology on which they are built is constantly changing, so there are only a few companies that manufacture LCD panels for televisions. In this case, the supplier of the LCD panels has a lot of power in the industry, because its buyers (the television producers) are highly dependent on LCD panels for their products, and those buyers have little choice as to where to source their LCD panels. For the television manufacturer, the only choices available are to continue to buy LCD panels from their current source, or if their source becomes so expensive that they no longer derive a competitive advantage from selling televisions, they could (1) move out of the TV sales industry, (2) design and manufacture their own LCD panels, or (3) buy their supplier. These choices have clear boundaries, and a firm can decide at what specific point it makes sense to buy or make the inputs to their supply.

How does this question extend to the supply of labour? To buy human capital implies hiring from the labour market, and to make human capital implies training and developing employees. The decision is not as clear-cut when looking at

human capital partly because it is very difficult to determine the difference in costs between these two options. But as discussed in HR Planning Today 6.5, it is possible to assess the cost of too much supply versus not enough. The Govern- ment of Canada produces several forecasts of labour supply that can help planners to decide what jobs should receive more development and training attention in anticipation of external hiring challenges. Some of the relevant forecasts produced by the Federal Government include

• Job vacancy rate. Statistics Canada produces monthly estimates of the number of jobs that are unfilled as a proportion of all jobs, by geographical region and by industry. This can help planners to understand areas of the job market that are expe- riencing or are expected to experience a shortage or surplus of available labour.

• Job openings by skill level. The Canadian Occu- pational Projection System (COPS) produces forecasts of job openings attributable to eco- nomic growth and employment growth, by skill level and industry. Planners can use these data to make longer-term estimates of labour shortage or surplus.

Taken together, planners use these data to help fore- cast the expected availability of external labour, which can then be incorporated into decisions around the importance of developing internal labour pools for talent.

Sources: Statistics Canada, “Job Vacancy Statistics,” http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=5202, Government of Canada; and Canadian Occupation Projection System: Job Openings (2015–2024). http://occupations.esdc.gc.ca/sppc-cops/l.3bd.2t.1.3lshtml@- eng.jsp?fid=50&lid=64.

By estimating the number of internal promotions and external hires, movement analysis can help planners to ensure that the firm is able to devote enough resources in the training and development of its current employees (i.e., the 99 employees who would have taken up positions at higher levels) and in the recruitment of the 68 new hires.

VACANCY MODEL The vacancy, renewal, or sequencing model analyzes human capital flows throughout the organization by examining inputs and outputs at each hierarchical or compensation level.43 Vacancy models have been found to have more predictive capacity than Markov models over short- and long-term periods (of 3, 5, and 10 years),44 although the common

Vacancy, renewal, or sequencing model Analyzes flows of employees throughout the organization by examining inputs and outputs at each hierar- chical or compensation level

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NEL 153CHAPTER 6 Ascertaining HR Supply

time frame for this model is one year into the future. It is important to calculate supply requirements one level at a time in a “top-down” fashion, beginning at the highest relevant level, because the normal direction of employee movement in an organization is from the bottom to the top. The rationale behind the vacancy model is simple: the supply needs at each salary level are determined by staffing changes—the number of employees promoted out of the level plus any losses (e.g., retirements, departures, terminations).

TABLE 6.2

NUMBER OF POSITIONS TO BE FILLED

JOB LEVEL NUMBER OF POSITIONS

AT START OF PERIOD STAFFING CHANGES TERMINATIONS

POSITIONS TO BE FILLED

4 1 1 0 1

5 6 6 3 9

6 20 1 5 6

7 32 2 10 12

8 40 2 14 16

9 50 3 21 24

149 15 53 68

Sources: Adapted from E.H. Burack and N.J. Mathys, Human Resource Planning: A Pragmatic Approach to Manpower Staffing and Development, 3rd ed. (Northbrook, IL.: Brace Park, 1996); D. Bartholomew, Stochastic Models for the Social Sciences (New York: Wiley,!1982); E.!Burack and J. Walker, Manpower Planning and Programming (Boston: Allyn & Bacon, 1972); R. Grinold and K. Marshall, Manpower Planning Models (New York: Elsevier North-Holland, 1977); R. Niehaus, “Models for Human Resource Decisions,” Human Resources Planning, Vol. 11, No. 2 (1988): 95–107; J. Walker, Human Resources Planning (New York: McGraw-Hill, 1980); and H. White, Chains of Opportunity: System Models of Mobility in Organizations (Cambridge, MA: Harvard University Press, 1970).

TABLE 6.3

EMPLOYEE MOVEMENT

POSITIONS TO BE FILLED

TOTAL RIPPLE OR CHAIN MOVEMENT

TOTAL EMPLOYEE MOVEMENT

1 — — — — 1

9 + 1 — — — — 10

6 + 1 + 9 — — — 16

12 + 1 + 9 + 6 — — 28

16 + 1 + 9 + 6 + 12 — 44

24 + 1 + 9 + 6 + 12 + 16 — 68

68 5 36 18 24 16 5 167

Sources: Adapted from E.H. Burack and N.J. Mathys, Human Resource Planning: A Pragmatic Approach to Manpower Staffing and Development, 3rd ed. (Northbrook, IL.: Brace Park, 1996); D. Bartholomew, Stochastic Models for the Social Sciences (New York: Wiley, 1982); E. Burack and J. Walker, Manpower Planning and Programming (Boston: Allyn & Bacon, 1972); R. Grinold and K. Marshall, Manpower Planning Models (New York: Elsevier North-Holland, 1977); R. Niehaus, “Models for Human Resource Decisions,” Human Resources Planning, Vol. 11, No. 2 (1988): 95–107; J. Walker, Human Resources Planning (New York: McGraw-Hill, 1980); and H. White, Chains of Opportunity: System Models of Mobility in Organizations (Cambridge, MA: Harvard University Press, 1970).

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NEL154 Strategic Human Resources Planning

Organizational policy is used to determine the extent to which these openings will be filled by internal and external supply. Losses are normally based on historical trends with respect to the proportion of employees at each level who normally exit from that level annually, while growth estimates are based on the normal business fore- casting process. Overall, vacancies in the organization lead to a sequence of internal promotions from lower levels as the open positions are filled by replacements. The vacancy model identifies the specific number of external and internal replacements required at each level and for the organization as a whole. Table 6.4 demonstrates the output of a vacancy model exercise. The assumptions that are required to produce this model include an estimate of the proportion of external hires that will be made at each job level; for example, this model assumes that job levels one and two will be filled 100 percent internally. The bottom row of the table shows the total expected forecast of external hires, and the columns break down the replacements and expected external hires by job level.

The vacancy model also demonstrates that despite the requirement to hire 114 new hires, this is being offset by 114 terminations, representing net growth of zero.

// SUBSTITUTION AND OTHER GAP STRATEGIES After forecasting the demand for and the supply of human capital, the difference between these two figures represents a surplus if the supply exceeds demand, or a gap if the demand exceeds supply. In the event of a gap, firms must hire externally in the short term, but have a few more options over the long term. Some strategies include outsourcing the extra requirement, focusing on retention strategies to reduce volun- tary terminations, increasing training and development efforts to further develop the internal labour pool, and substituting human efforts with automation (see HR Planning Notebook 6.4 for ideas on enhancing retention policies). The introduction to Chapter 5 discusses the uncertainty that automation will have on employment over the next

TABLE 6.4

OUTPUT OF A VACANCY MODEL EXERCISE

LEVEL NO. OF EMPLOYEES AT START OF YEAR

ANNUAL LOSSES

PROMOTIONS TO LEVEL

LEVEL OUTFLOWS

EXTERNAL HIRING

1 1 1 1 1 0

2 6 1 2 2 0

3 18 3 4 5 1

4 45 9 9 13 4

5 88 22 14 31 17

6 156 78 0 92 92

314 114 30 144 114

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NEL 155CHAPTER 6 Ascertaining HR Supply

Automation is expected to become a popular substitution strategy over the next decade, particularly for low-skilled or repetitive jobs.

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HR PLANNING NOTEBOOK 6.4

DEVELOPING EFFECTIVE EMPLOYEE RETENTION POLICIES

Although most organizations tend to devote consider- able time and resources to the process of attracting new workers, a great many fall short by not putting enough emphasis on retaining the high-quality workers they cur- rently employ. In order to rectify this situation, studies note the importance of making retention policies a top corporate priority. Several studies have clearly shown that managers at all levels should be held responsible for the retention of their employees, and managerial per- formance evaluation should incorporate specific measur- able goals in this matter. Greater importance should be given to identifying high-performing and high-potential employees, and their associated values, interests, needs, and so on, before they leave to work for competitors. Organizations should conduct a demographic analysis

and compensation reviews by using their HRMS. These analyses will enable HR planners to identify potential gaps in skills and develop policies to ensure sufficient well-trained employees are on hand over the medium and long term. Other retention policy recommendations include (1) forming a “retention task force” to include HR professionals, line unit managers, and senior execu- tives; (2) reinforcing employee loyalty and performance by “promoting from within” wherever possible; (3) measuring turnover on an ongoing basis at corporate, division, and local levels, utilizing multiple measures; (4) holding line managers responsible for retention; and (5) reviewing and addressing compensation and working condition issues before they become issues for dissatisfaction that prompt employees to leave the organization.

Sources: Adapted from M. Young, “The Case of the Missing CEO,” Canadian HR Reporter, February 14, 2000: pp. 117–120; and M. Abrams, “Employee Retention and Turnover: Holding Managers Accountable,” Trustee, Vol. 55, No. 3 (March 2002), T1–T4.

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10 years. Looking at the automobile industry as an example of how automation might be used as a substitute for human labour, the industry has transformed only its most basic and repetitive functions such as paint and body shops.45 It appears that fast response may be an impediment to automation, since it takes time to develop and adjust the tools to perform the work, and it takes time to recoup the investments made in the technology and machinery. People can be retrained much more quickly and efficiently.

MANAGING THE BULLWHIP EFFECT Managing the supply of human capital is most effective when the stock and flow of that human capital are considered together and in detail. Human capital segmentation, Markov analysis, movement analysis, and vacancy models all consider the current stock of employees and how the flow of those stocks will influence the supply. This level of detail can help to reduce the bullwhip effect that is known to affect demand and supply relationships. The bullwhip effect occurs when errors in estimates of supply become amplified as those errors are compounded along the supply chain. For example, if the manager at a clothing retailer is uncertain as to the exact supply of part-time sales people in the store, he or she might decide to estimate the supply a little on the low side just to ensure there is not a shortfall of employees available to work part-time. When considering the demand for part-time sales people, planners will reduce risk by estimating demand a little on the high side, to make sure that there is not a shortage of part-time sales people. Now this error has been compounded, so when a gap analysis is examined between the estimated demand for and supply of part-time sales people, the gap will be much larger than anticipated by either the demand or supply estimate. This exaggerated gap gets passed to recruitment, who in order to reduce risk will recruit for slightly more than the estimated amount to make sure there is not a shortage of part-time sales people. Now this error has been compounded yet again. After recruitment has taken place, planners are shocked to learn that they greatly overestimated their need for part-time sales people. The bullwhip effect can be present in any kind of supply chain, and in the context of human capital management can waste recruitment resources, employee time, and the firm’s money. HR Planning Notebook 6.5 provides recommendations around understanding and reducing the negative consequences of forecasting errors.

Bullwhip effect When errors in esti- mating the supply of human capital are amplified along the supply chain, resulting in large overestimates of hiring needs

HR PLANNING TODAY 6.5

HOW ACCURATE IS YOUR FORECAST?

Forecasts are almost never absolutely correct. Given the unpredictable and ever-changing nature of the economy, business plans, and management preferences, it is not surprising that forecasts stand little chance of being exact. But being precise is not the main objective of forecasting. What is important is understanding what is worse: being wrong by underestimating supply or being wrong by over- estimating supply. For a high-tech company that estimates that it should hire 10 new engineers, will business suffer

more from hiring 10 when they only needed 6, or from hiring 10 when they really needed 14? In order to reduce the costs of errors in forecasts, planners can do two things: (1) estimate the amount of error in forecasting, and (2) consider the costs of underestimates versus the cost of overestimates.

Given what we know about the bullwhip effect, when demand estimates are based on production, sales, or some other organizational index, the error in that measure will

(continued )

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// SUMMARY This chapter presented a range of methods used in organizations to determine future HR supply requirements. Skills and management inventories contain information that allows a detailed analysis of the current workforce to determine whether we can meet the demand for replacement from current employees in the organization. Markov models use historical patterns of individual movement between jobs in the organization based on the transitional probabilities for promotion, transfer, and remaining in the particular job for an annual or specified future period. Markov analyses allow planners to model the number of open posi- tions throughout the organization and can track career progression and the time required for individuals to reach specified target jobs. Linear programming and simulation use math- ematical equations and algorithms to model supply given specified constraints such as minimizing labour cost or achieving a desired mix of diverse employee group memberships. Movement analysis enables the identification of not only the location and number of open positions that must be filled by the organization but also the total number of individuals who will be moved to fill these openings. The vacancy model provides specific information on total flows into and out of each job or compensation level, as well as for the organization as a whole. While any forecasting method will lead to error, it is important for planners to understand the potential sources of error in forecasting supply, and to monitor past forecasts and forecasting methods in order to continuously improve forecasting practices.

KEY TERMS bullwhip effect p. 156 employee segmentation p. 137 external supply p. 136 internal supply p. 136 linear programming p. 149

tend to be compounded by subsequent estimates. In order to measure how much error has crept into our estimates, planners can compare past forecasts with actual require- ments. Taking the average of the error rates over several years (or other relevant period) of estimates will provide some indication of the extent of the error and also its direc- tion (that is, whether the estimates tend to undershoot or overshoot actual requirements).

After assessing the amount of error in estimates, planners can examine the costs of being wrong in either direction. Managers should consider the impact to the actions that are relevant to implementing the firm’s strategy when estimates are too low; can the skills that

are required to perform the work be acquired through other means (temporary workers, contracting the work to external sources, auctioning the work on a talent portal, new hiring, etc.)? Planners must also consider what will happen if estimates are too high; can we use the sur- plus employees in some other way that is useful to the employee and to the organization? Are the differences in errors in one direction significantly more costly to the organization than errors in the other direction? Answers to these questions can help planners and managers to understand how much error tends to be in their forecasts, the severity of mistakes in one direction or the other, and the costs associated with being wrong.

Source: Adapted from Cappelli, P. (2009). A supply chain approach to workforce planning. Organizational Dynamics, 38, pp. 8–15.

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158 NELStrategic Human Resources Planning

management inventory p. 145 Markov model p. 146 mass customization of HR p. 143 movement analysis p. 150 skills gap p. 139 skills inventory p. 144 transitional probability p. 147 vacancy, renewal, or sequencing model p. 152

DISCUSSION QUESTIONS 1. This chapter discusses some of the reasons for giving preferential consideration to

your own workforce to fill job openings. Are there any disadvantages? What can management do to mitigate these potentially negative effects?

2. Employee segmentation involves grouping employees by similar characteristics or preferences for the employment contract. Discuss how a company like Canadian Tire might segment its store employees.

3. This chapter identified three sources of labour (Aboriginal people, older people, and automation) that are growing and may be available to meet labour demands. Imagine that you are the owner of a warehouse distribution centre in Edmonton, Alberta. On your own or in groups, prepare a list of the advantages and limitations for using one of these labour sources.

4. A Markov model provides important information to the HR supply analyst with respect to movement or flows of employees through various jobs in the organi- zation. Discuss how this supply-forecasting technique might also provide useful information to line managers and workers (i.e., non-HR staff).

EXERCISE 1. The corporate HR department of a major Canadian financial institution is grouped

by function; for example, there is a compensation group, a recruitment and selec- tion group, a benefits group, and so on. Each group within the HR function has the same hierarchy consisting of administrative assistants, HR analysts, HR specialists, and HR managers. In total at the beginning of the period there are 6 administrative assistants, 16 analysts, 10 specialists, and 10 managers across the HR function. The transitional probabilities for each job are:

• Administrative assistants: 70% stay in their job, and 30% move to analyst roles. • Analysts: 75% stay in their role, 12.5% move to specialist roles, and 12.5% exit

the firm. • Specialists: 60% stay in their role, 20% move to manager roles, and 20% exit

the firm. • Managers: 80% stay in their role. 10% move to executive jobs, and 10% leave

the firm. • Construct a Markov matrix for the jobs of the administrative assistants, ana-

lysts, specialists, and managers, showing movement from Time 1 to Time 2. Does this matrix suggest any HR issues that could use attention?

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159CHAPTER 6 Ascertaining HR Supply NEL

CASE STUDY HR PLANNING AT M&K

1. Workforce complement at M&K as of the end of this year is as follows:

CEO Level 1 1

Executive Vice-President Level 2 5

Senior Vice-President Level 3 10

Vice-President Level 4 20

Director Level 5 100

Senior Manager Level 6 200

Manager Level 7 400

Associate Level 8 500

Assistant Level 9 1200

2. The staffing levels for CEO and EVPs are to remain unchanged next year. The number of SVPs and VPs required are dependent on annual revenues. Staffing levels for SVPs and VPs are considered to be optimal in this year. Revenue generated for the year 2011 was $2 billion with 10 SVPs and 20 VPs. The revenue level for next year is expected to reach $3 billion.

3. The company is planning to open three additional offices across the country next year. Each office requires 5 directors, 15 senior managers, 30 managers, 50 associates, and 80 assistants.

4. The company will also be outsourcing its payroll and benefits admin- istration to DES next year. The company is getting rid of its donut business because of the shift in consumer tastes to healthier foods. Cur- rently, 15 directors, 20 senior managers, 30 managers, 50 associates, and 150 assistants are involved in these activities.

5. Introduction of a new computer system will increase the productivity of the assistants by 50 percent but will require hiring a team of tech- nical staff, which will include 5 senior managers, 10 managers, and 50 associates.

6. Forecasted losses for next year are as follows:

Quits (%) Dismissals (%) Retirements (%) Level 1 0 0 0

Level 2 20 0 20

Level 3 10 0 10

Level 4 10 0 0

Level 5 40 5 0

Level 6 15 10 0

Level 7 50 5 0

Level 8 30 10 0

Level 9 40 5 0

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160 NELStrategic Human Resources Planning

7. M&K has two HR supply policies, as follows: a. Exclusively “promote from within” b. A combination of internal promotion and external hires, as follows:

Inside (%) Outside (%) Level 1 100 0

Level 2 80 20

Level 3 70 30

Level 4 60 40

Level 5 50 50

Level 6 40 60

Level 7 30 70

Level 8 20 80

Level 9 0 100

8. According to information stored on M&K’s comprehensive HRIS system, annual employee movements between levels 5 and 9 in last year are as follows:

Level 4 Level 5 Level 6 Level 7 Level 8 Level 9 Exit Total Level 5 10 80 5 5 100

Level 6 10 160 30 200

Level 7 20 360 20 400

Level 8 70 455 175 700

Level 9 300 500 200 1000

9. M&K has also been tracking its revenues against the number of managers on staff. Below is the information obtained from M&K’s ERP:

Year No. of Managers Revenues ($B) This year (year X) 400 2

Year X – 1 320 1.8

Year X – 2 250 1.5

Year X – 3 200 1.3

Year X – 4 150 1.0

QUESTIONS

1. Estimate the total HR demand for M&K for next year, by job level. 2. Estimate changes in HR supply for M&K for next year, by job level.

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161CHAPTER 6 Ascertaining HR Supply NEL

3. Calculate the number of employee movements if M&K uses: a. Exclusively a “promote from within” policy, or b. A mix of internal and external supply as detailed in item 7b As HR Director, what do you see as some of the talent strategies and plans that have to be in place to facilitate each of the above options?

4. Calculate the transitional probabilities of movements for levels 5 to 9 on the basis of information provided in item 8. Using the calculated transitional probabilities, what employee movements (at levels 5 to 9) might take place next year?

5. Using information provided in item 9, estimate the number of managers that M&K would need using regression analysis if revenue levels: a. Increase to $2.5 billion b. Increase to $3.5 billion How many managers would M&K have to let go if revenues drop to $1.5 billion?

// REFERENCES 1. Boudreau, J., and R. Jesuthasan. 2011. “Chapter 2: Where Are Your Pivotal

Talent Segments?” Transformative HR: How Great Companies Use Evidence-based Change for Sustainable Advantage. Jossey-Bass.

2. Ibid. 3. Ibid. 4. Ibid. 5. Grant, T. 2014. “Hiring for the Future.” The Globe and Mail (November 17):

B1, B3. 6. Gault, C. 2014. “Talent Crisis of Their Own Making,” The National Post

(November 25): FP10. 7. https://neurodiversitysymposium.wordpress.com/what-is-neurodiversity/ 8. http://www.canadianbusiness.com/innovation/autism-neurodiversity-hiring/ 9. Hirsch, T. 2014. “Skilled Workers Are Good, But Adaptable Workers Are

Better.” The Globe and Mail (May 9): B2. 10. http://www.statcan.gc.ca/pub/75-004-m/75-004-m2016001-eng.htm 11. McBey, K., and L. Karakowsky. 2000. “Examining Sources of Influence

on Employee Turnover in the Part-Time Work Context.” Leadership and Organization Development Journal, Vol. 21, No. 3: 136–144.

12. Kohl, N. 2000. “HR Managers Losing the Retention Game.” Pro2Net (November 7): 2.

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162 NELStrategic Human Resources Planning

13. North, N., E. Rasmussen et al. 2005. “Turnover Amongst Nurses in New Zealand’s District Health Boards: A National Survey of Nursing Turnover and Turnover Costs.” New Zealand Journal of Employment Relations, Vol. 30, No. 1: 49–63; Kohl, N. 2000. “HR Managers Losing the Retention Game.” Pro2Net (November 7): 2.

14. Gram, J. 2004. “New Approaches to Human Resource Forecasting in the Public Sector.” Public Manager, Vol. 32, No. 4; Joiner, T., T. Bartram, and T. Garreffa. 2004. “The Effects of Mentoring on Perceived Career Success, Commitment and Turnover Intentions.” Journal of American Academy of Business, Vol. 5, No. 1–2: 164–171.

15. Lofgren, E., S. Nyce et al. 2002. “Will You Be Stranded by a Worker Shortage?” Electric Perspectives, Vol. 27, No. 3: 22–29.

16. Walker, J. 2003. “Perspectives: Where Are We Going?” Human Resource Planning, Vol. 26, No. 1: 14–16.

17. Buhler, P. 2004. “Managing in the New Millennium.” SuperVision, Vol. 65, No. 2: 20–23; Martin, R. 1967. “Skills Inventories.” Personnel Journal (January): 28–83; Kaumeyer, R.H. 1979. Planning and Using Skills Inventory Systems. New York: Van Nostrand Reinhold.

18. Schwarzkopf, A., R. Mejias et al. 2004. “Effective Practices for IT Skills Staffing.” Communications of the ACM, Vol. 47, No. 1: 83–88; Martin, R. 1967. “Skills Inventories.” Personnel Journal (January): 28–83; Seamans, L. 1978. “What’s Lacking in Most Skills Inventories.” Personnel Journal (March): 101–106.

19. Bechet, T.P., and W.R. Maki. 1987. “Modeling and Forecasting: Focusing on People as a Strategic Resource.” Human Resource Planning, Vol. 10, No. 4: 209–217; Konda, S., and S. Stewman. 1980. “An Opportunity Labor Demand Model and Markovian Labor Supply Models: Comparative Tests in an Organization.” American Sociological Review, Vol. 45, No. 2 (April): 276–301; Weigel, H., and S. Wilcox. 1993. “The Army’s Personnel Decision Support System.” Decision Support Systems, Vol. 9, No. 3 (April): 281–306.

20. Bartholomew, D.J. 1973. Stochastic Models for the Social Sciences. London: Wiley; Law, H. 1977. “A Projection Model and a Rational Policy for the Supply and Demand of Human Resources from an Educational Institution.” Applied Mathematical Modeling, Vol. 1, No. 5 (June): 269–275.

21. Meehan, R., and B.S. Ahmed. 1990. “Forecasting Human Resources Require- ments: A Demand Model.” Human Resource Planning, Vol. 13, No. 4: 297–307.

22. Heneman, H.G., and M.G. Sandiver. 1977. “Markov Analysis in Human Resource Administration: Applications and Limitations.” Academy of Man- agement Review (October): 535–542; Vassiliou, P.C. 1976. “A Markov Chain Model for Wastage in Manpower Systems.” Operational Research Quarterly, Vol. 27, No. 1: 57–70.

23. Gans, N., and Y. Zhou. 2002. “Managing Learning and Turnover in Employee Staffing.” Operations Research, Vol. 50, No. 6: 991–1007; Bechet, T.P., and W.R. Maki. 1987. “Modeling and Forecasting: Focusing on People as a Strategic Resource.” Human Resource Planning, Vol. 10, No. 4: 209–217.

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163CHAPTER 6 Ascertaining HR Supply NEL

24. Blakely, R. 1970. “Markov Models and Manpower Planning.” Industrial Management Review (Winter): 39–46.

25. Stone, T., and J. Fiorito. 1986. “A Perceived Uncertainty Model of Human Resource Forecasting Technique Use.” Academy of Management Review, Vol. 11, No. 3: 635–642.

26. Zeffane, R., and G. Mayo. 1995. “Human Resource Planning for Rightsizing: A Suggested Operational Model.” American Business Review, Vol. 13, No. 2 (June): 6–17.

27. Ibid: 6–17. 28. Gans, N., and Y. Zhou. 2002. “Managing Learning and Turnover in

Employee Staffing.” Operations Research, Vol. 50, No. 6: 991–1007; Nielsen, G.L., and A.R. Young. 1973. “Manpower Planning: A Markov Chain Application.” Public Personnel Management (March): 133–143.

29. White, H. 1970. Chains of Opportunity: System Models of Mobility in Organizations. Cambridge, MA: Harvard University Press.

30. Stone, T., and J. Fiorito. 1986. “A Perceived Uncertainty Model of Human Resource Forecasting Technique Use.” Academy of Management Review, Vol. 11, No. 3: 635–642.

31. Gridley, J. 1986. “Who Will Be Where When? Forecast the Easy Way.” Personnel Journal, Vol. 65, No. 5 (May): 50–58.

32. Sandefur, G. 1981. “Organizational Boundaries and Upward Job Shifts.” Social Science Research, Vol. 10, No. 1 (March): 67–82; Bartholomew, D. 1996. Mobility Measurement Revisited in the Statistical Approach to Social Measurement. San Diego: Academic Press.

33. Tuma, N. 1976. “Rewards, Resources, and the Rate of Mobility: A Nonsta- tionary Multivariate Stochastic Model.” American Sociological Review, Vol. 41, No. 2 (April): 338–360.

34. Rowland, K., and M. Sovereign. 1969. “Markov Chain Analysis of Internal Manpower Supply.” Industrial Relations (October): 88–99; Glen, J.J. 1977. “Length of Service Distributions in Markov Manpower Models.” Operational Research Quarterly, Vol. 28, No. 4: 975–982.

35. Lagarde, M., and Cairns, J. 2012. “Modelling Human Resources Policies with Markov Models: An Illustration with the South African Nursing Labour Market.” Health Care Management, Vol. 15: 270–282.

36. Al-Harbi, K. 2000. “Optimization of Staff Numbers in the Process Indus- tries: An Application of DEA.” International Journal of Manpower, Vol. 21, No. 1: 47–55; Gans, N., and Y. Zhou. 2002. “Managing Learning and Turnover in Employee Staffing.” Operations Research, Vol. 50, No. 6: 991–1007; Weigel, H., and S. Wilcox. 1993. “The Army’s Personnel Decision Support System.” Decision Support Systems, Vol. 9, No. 3 (April): 281–306.

37. Patz, A.L. 1970. “Linear Programming Applied to Manpower Management.” Industrial Management Review, Vol. 11, No. 2 (Winter): 131–138.

38. Gans, N., and Y. Zhou. 2002. “Managing Learning and Turnover in Employee Staffing.” Operations Research, Vol. 50, No. 6: 991–1007; Walker, J.W. 1980. Human Resource Planning. New York: McGraw-Hill.

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39. Lavieri, M.S., and Puterman, M.L. 2009. “Optimizing Nursing Human Resource Planning in British Columbia.” Health Care Management, Vol. 12: 119–128.

40. Bartholomew, D. 1982. Stochastic Models for the Social Sciences (3rd ed.). New York: John Wiley; Bartholomew, D. 1996. Mobility Measurement Revis- ited in the Statistical Approach to Social Measurement. San Diego: Academic Press; Burack, E.H., and N.J. Mathys. 1996. Human Resource Planning: A Pragmatic Approach to Manpower Staffing and Development (3rd ed.). Northbrook, IL: Brace Park; White, H. 1970. Chains of Opportunity: System Models of Mobility in Organizations. Cambridge, MA: Harvard University Press; White, H. 1970. “Matching Vacancies and Mobility.” Journal of Political Economy, Vol. 78, No. 1 (January): 97–105.

41. Geerlings, W., and Van Veen, K. 2001. “Simulating Patterns of Organizational Careers.” Computational and Mathematical Organization Theory, Vol. 7, No. 4: 287–310; White, H. 1970. Chains of Opportunity: System Models of Mobility in Organizations. Cambridge, MA: Harvard University Press; White, H. 1970. “Matching Vacancies and Mobility.” Journal of Political Economy, Vol. 78, No. 1 (January): 97–105.

42. Monks, K. 1996. “Global or Local? HRM in the Multinational Company: The Irish Experience.” International Journal of Human Resource Management, Vol. 7, No. 3 (September): 721–735.

43. Geerlings, W., and K. Van Veen. 2001. “Simulating Patterns of Organiza- tional Careers.”Computational and Mathematical Organization Theory, Vol. 7, No. 4: 287–310; White, H. 1970. Chains of Opportunity: System Models of Mobility in Organizations. Cambridge, MA: Harvard University Press; White, H. 1970. “Matching Vacancies and Mobility.” Journal of Political Economy, Vol. 78, No. 1 (January): 97–105; Bartholomew, D. 1982. Stochastic Models for the Social Sciences (3rd ed.). New York: John Wiley; Bartholomew, D. 1996. Mobility Measurement Revisited in the Statistical Approach to Social Measurement. San Diego: Academic Press.

44. Konda, S., and S. Stewman. 1980. “An Opportunity Labor Demand Model and Markovian Labor Supply Models: Comparative Tests in an Organiza- tion.” American Sociological Review, Vol. 45, No. 2 (April): 276–301.

45. Knoess, C., R. Harbour, and S. Scemama. (2016). “Prepare Your Workforce for the Automation Age.” Harvard Business Review Digital Articles (November 23): 2–5.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand why succession management is important. • Trace the evolution of succession management from its roots in replacement

planning, comparing the two models with respect to focus, time, and talent pools.

• List the steps in the succession management process. • Compare and contrast the job-based and competency-based approaches to

aligning future needs with strategic objectives. • Discuss the four approaches to the identification of managerial talent. • Describe several ways to identify high-potential employees. • Evaluate the advantages and disadvantages of the five management develop-

ment methods: promotions, job rotations, special assignments, formal training, and mentoring and coaching.

• Recognize the difficulties in measuring the success of a management succes- sion plan.

• Outline the employee’s role in the succession management process. • Describe the role of HR in succession management.

SUCCESSION MANAGEMENT

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NEL166 Strategic Human Resources Planning

// IMPORTANCE OF SUCCESSION MANAGEMENT Executives of any organization must develop the next generation of leaders, just as sports teams need to develop the next generation of players. Succession management refers to the systematic process of determining critical roles within the organization, identifying and evaluating possible successors, and developing them for these roles.1 (Succession management might be viewed as part of the talent management process of an organization that focuses on the flow of employees, starting from selection to career management to exit, through the organization.) The importance of succession management is discussed in HR Planning Notebook 7.1.

Succession management used to focus mainly on the CEO. However, there must be a pipeline of talent for the most critical roles:

1. The CEO 2. The senior management team (executives) 3. Critical roles based on long-term value to the organization (such as scientists

or customer relationship specialists)2

Edwards Lifesciences is a manufacturer of medical prod- ucts with more than $1 billion in sales and 5700 employees. Its CEO dedicates 20 percent of his time to talent manage- ment issues. This highly profitable company attributes its succession management success to its identification of 75 critical positions (which it refuses to reveal for competi- tive reasons). Each of these 75 positions has at least two employees identified as replacement candidates. The com- pany spends millions of dollars annually to develop quali- fied candidates for these positions, including e-learning

initiatives and weeklong leadership programs for upper management and promising talent. Almost 70 percent of jobs are filled by internal candidates. Every board meeting and every management meeting includes an item on suc- cession management. For its program to track and retain candidates for critical positions, Edwards Lifesciences was awarded the Optimas Award for Competitive Advantage.

Source: Ruiz, G. “Edwards Lifesciences: Optimas Award winner for Competitive Advantage,” www.workforce.com, retrieved

October 13, 2008.

SUCCESSION MANAGEMENT AT EDWARDS LIFESCIENCES

HR PLANNING NOTEBOOK 7.1

THE IMPORTANCE OF SUCCESSION MANAGEMENT

Organizations must view succession management as a critical activity aligned with the organization’s business strategy. Due to factors such as the impending retire- ment of millions of baby boomers, the large increase in the turnover of CEOs, and the need to transfer corporate knowledge, there is increasing pressure on organiza- tions to develop succession plans. Companies without a succession plan experience a drop of about one-third in

business after the transition to new management. The effective implementation of succession management has been linked to these outcomes: the retention of key talent; increase in shareholder value; and reduced senior execu- tive turnover after succession. Moreover, organizations that have developed a reputation for developing key talent have a significant value proposition to attract new employees and retain key ones.

Source: Stadler, K. 2011. “Talent reviews: the key to effective succession management,” Business Strategy Series, 12, 5, pp. 264–271, www.pwec .com/ca/en/private-company/lets-talk/succeding-through-succession.

Succession management The systematic process of determining critical roles with the organiza- tion, identifying and evaluating possible suc- cessors, and developing them for these roles

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Succession management consists of a process of identifying employees who have the potential to assume key positions in the organization and preparing them for these positions. The identification of talent is always paired with ongoing programs to develop that talent. Succession management ensures continuity in leadership and, like any rookie program, develops the next generation of players. The goals of succession management programs are to identify and prepare future leaders and to ensure business continuity.3 The first priority of any succession management program is to have a plan to replace its leaders. Organizations with positive reputations for leadership brands tend to outperform their peers.4

As Peter Drucker says, the ultimate test of good management is succession manage- ment, ensuring that there is a replacement for the CEO.5 Organizations must prepare for expected and unexpected turnover, for key players die, retire, or quit. Unfortunately, only about half of organizations answered “yes” when asked the question “If your presi- dent or CEO resigned today, do you know who would take charge of the company?”6 At McDonald’s, the excellent succession management program enabled the company to designate a replacement within six hours of the CEO’s sudden death, compared to a more typical delay of six months. The research shows that delays in naming a successor result in decreasing operating performance, and that these negative effects can last up to two years.7 Fiery young entrepreneurs who build hugely successful businesses often see them fail in the hands of their untrained children. Many Canadian dynasties (e.g., Eaton’s, Simpsons) have failed because their heirs were incapable of managing the business.

Succession management is needed even when retirements and company sellouts are predictable. The baby boomers who currently hold most of the leadership positions are retiring. Twenty percent of top management positions and 25 percent of middle management positions will become vacant in the near future, and retirements of baby boomers (the first of whom turned 65 in 2011) will accelerate this trend.8 And 75 percent of executives are wor- ried about their ability to develop leaders.9 Yet this worrying does not result in action plans, as only 25 percent of companies report having a formal succession plan in place.10 About one-half of the HR managers don’t consider grooming potential leaders a high priority.11

At a minimum, firms need to plan for replacements, and personnel planning was the first step in the march toward sophisticated models of succession management. Some reasons for succession management are listed in HR Planning Notebook 7.2. The next section traces this evolution.

HR PLANNING NOTEBOOK 7.2

WHY ORGANIZATIONS HAVE SUCCESSION MANAGEMENT PROGRAMS

1. Improve internal candidate pools. 2. Assure business continuity. 3. Reduce skill gaps. 4. Retain employees. 5. Help individuals realize their career plans within the

organization.

6. Develop leaders more quickly. 7. Encourage the advancement of diverse groups. 8. Improve employees’ ability to respond to changing

environmental demands.

Sources: K. Lamoureux, “Developing Leaders,” Leadership Excellence, Vol. 25, No. 7 (July 2008): 11, 12; and A. Paradise, “Many Barriers Inhibit Success of Succession Planning,” TD Magazine, Vol. 64, No. 6 (2010): 60.

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EVOLUTION OF SUCCESSION MANAGEMENT Replacement planning can be defined as the process of identifying short-term and long- term emergency backups to fill critical positions. If the CEO dies, who will be prepared to take over that position? Is there a replacement for the vice-president of marketing if he or she suddenly quits to take another job? The events of September 11, 2001, tragi- cally presented a worst-case scenario. Bond trading firm Cantor Fitzgerald lost 700 of its 1000 World Trade Center staff, including most of its executives.

Formal and methodical replacement planning has existed for over 30 years. This section examines how replacement planning has evolved into succession management by:

• Broadening the focus • Expanding the time horizon • Creating a talent pool of replacements • Improving the evaluation system

BROADER FOCUS The focus of replacement planning was the job, and having a replacement ready to fill that job if the incumbent died or quit. This concept referred mainly to the succession and replacement charts for the high-level or key positions in the organization. Each key position is represented by a box on the chart, with the name and possible retire- ment or departure date of the incumbent in the box (see Figure 7.1). Below the box are

Replacement planning The process of iden- tifying short-term and long-term emergency backups to fill critical positions

FIGURE 7.1

EXAMPLE OF REPLACEMENT CHART

VP Production C. Chan (A2) C. Berr y (B2) A. Houle (B3)

VP Systems A. Singh (B2) H. Psaus (B3) J. Roller (C4)

VP Client Services H. Robertson (A1)

C. Yulater (C1) H. Inmitey (C3)

Succession Codes Readiness Performance A. PN - Promotable Now B. ND - Needs Development C. R - Retain in current position

1. 2. 3. 4.

Excellent Above average Acceptable Needs improvement

President, Megacorp C. Rawler

H. Robertson (A1) C. Chan (A2)

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the names of two or three potential successors, with codes indicating readiness next to their names. These would be, for example, codes such as “PN” for “promotable now” or “ND” for “needs development” or R (Retain in current position).

As you can imagine, the promotion of one employee causes a ripple or chain effect, as subsequent employees are promoted to fill the sequential openings.

In short, replacement planning consisted of a periodically updated table of employees who might be nominated if a need arose. This type of planning focused on the high-potential candidates (replacement track stars), all ready to step into vacant positions, and in doing so set off a chain effect throughout the organization. This model assumed that people have single careers within one organization. Thus, replacements were replicas of the current jobholders.

This planning depended on a stable future, in which the knowledge, skills, attitudes, and other attributes (KSAOs) of future managers looked pretty much like those of the cur- rent managers. Jobs of the next 5 to 10 years were assumed to be identical to the existing jobs. Organizational structures (i.e., how the organization was set up along divisional lines, product lines, or functional lines) were unchanging, and few new competitors were seen on the horizon. Obviously, this type of scenario just doesn’t exist for most companies.

In replacement planning, the starting point was the job, whereas in succession man- agement, the starting point is the strategy of the organization. Employees are selected on the basis of long-term goals, and the developmental plans for employees are aligned with strategic plans, not position replacements.

A case might best illustrate how succession management aligns with strategy. Tradi- tionally, the goal of a large utility like Ontario Hydro was to provide safe, reliable energy. Its core competencies were reliability of distribution, measurement of consumption, and the maintenance of its power plants. However, deregulation and a more competi- tive environment forced Ontario Hydro to compete on price and services. Sales and marketing were the new competencies needed. The strategy changed from providing energy to marketing energy. Thus, in the long run, Ontario Hydro must identify or develop managers who have not only sales and marketing abilities but also the ability to change a production culture to one of marketing.12

TIME HORIZON The traditional planning approach was concerned with immediate and short-term replace- ments. Who is our backup for the vice-president we are planning to promote in 6 to 12 months? A strategic focus of under one year is a “business as usual” perception, which, if repeated, will not be true over a 10-year period. This short time perspective does not allow for the intake or career management of those with different skills in growth areas.

Succession management looks at a longer term (after ensuring that immediate replacements are in place) and focuses on a future of two years or more. Obviously, this is harder to do, and so, rather than identify one replacement, succession managers identify talent pools.

TALENT POOLS Traditional models of HR planning looked at succession as the passing of the baton to the next capable runner. Managers would identify their top performers and groom them for success. Sometimes two or three successors would be identified, and they would

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be in a race to the finish line of executive promotion. This practice may have worked when organizations consisted of dozens of levels, each manager having many assistant managers. However, currently organizations have found that their designated backup personnel fill only 30 percent of the open positions for which they were slotted.13 Flatter organizations with fewer “apprentices” can no longer rely on this approach. The key is not to develop a specific successor to fill any position (done by about one- third of organizations) but to develop several multiple successors (about two-thirds of organizations do this) for every position.14 The place to start is with positions that are difficult to fill because of talent shortages. More importantly, organizations have moved beyond succession planning just for CEOs and top executives. They define talent much more broadly and attempt to have potential employees in place for any key position.

As employees cannot trust organizations to provide lifetime job security, so too organizations cannot rely on single individuals or a small group of employees for their succession plans. Organizations are trying to identify and develop as many employees as possible to ensure employee departures and changing needs will not leave them harmed. But what is the right number of employees to develop? One rule of thumb that David Ulrich and Norm Smallwood use in their consulting and research is that about 10 to 15 percent of the workforce is high-potential talent.15

At MDS, a medical supply company, many of the high-potential employees are not aware of being tracked, because “we do not want to create a culture in which some people feel they are special and others feel their potential is not being recognized.”16

However, by not telling employees this, companies risk having employees leave the organization for one that offers better opportunities, and companies also risk having to groom someone who may not want the job. (Nevertheless, most employees realize their special status through the frequency of their promotions, assignments, and training.) Employers must avoid promises such as “You will become CEO in five years”; such promises are an implicit contract that may be judged to be binding.

Does identifying many successors solve these problems? Surely competition among successors will ensure that the best candidate wins by trying harder and demanding better training. Furthermore, if one successor does not develop to the potential that was anticipated or quits the organization, then others are willing and ready. But this approach has problems too. One is that candidates might sabotage each other by not sharing important information or by raiding key employees to improve their own track records. As well, many might engage in managing impressions and performing for short- term results in order to be evaluated more highly. This strategy does not encourage team playing, which is a force in organizational culture.

There are no easy solutions to these problems. The key is to communicate to these star employees that they are valued and that they have leadership potential, without ever promising anything. Another approach is to tell high-potential employees about their status, and then explain that they will be given a series of developmental challenges, and their potential will be continually assessed.

Any organization needs a pool of talent and must develop many employees with flex- ible job skills and competencies. A “pool” is a good description of the next generation of talented leadership because the term implies fluidity and responsiveness to the impact of forces. The talent pool is considered a corporate resource and is not the property of indi- vidual organizational units. This evolution from personnel planning to succession manage- ment has led to a model of generating pools of leadership talent within an organizational context of global competition, environmental turbulence, de-layered organizations, and new technologies. Talent segmentation, the identification of employees who are critical to the success of the organization, is expected to become as important as customer segmentation.17

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Furthermore, a succession management approach should not only depend on internal candidates, but also track external candidates. Rather than rely on inbred internal man- agers, the new generation of succession managers tracks high performers in the external market, thus ensuring that new skills and ideas flow into the organization. Large compa- nies such as IBM and AT&T have recruited over half their executives from outside the organization to obtain the skills that these mega-companies were unable to predict they would need or to develop internally. HR Planning Notebook 7.3 compares the advantages and disadvantages of internal and external candidates. The list of advantages of internal candidates is more robust than for those of external candidates, and the reality is that about two-thirds of internal candidates do succeed.18 Moreover, it appears that when a company is doing well, internal candidates are favoured to sustain high performance, because they possess valuable firm-specific knowledge.19 But overall, it appears that companies that are performing well do better by hiring from within, and those companies that are struggling show better returns by hiring outsiders.20 Interestingly, it appears that if the former CEO stays in the company (usually as chair of the board), this retention has a pronounced effect in preventing the new CEO from making significant changes.21

RATING SYSTEM Traditional planning relied on the identification of the replacement people by a single rater. Previously, only the boss of the high-potential employee supplied information about that employee, and the information on which succession plans were based could be both out of date and unreliable. The gathering and recording of these judgments may

HR PLANNING NOTEBOOK 7.3

INTERNAL VERSUS EXTERNAL

Advantages of Internal Candidates

• Organizations have more and better information about internal candidates.

• Organizations that offer career development and opportunities to internal candidates increase com- mitment and retention among their employees.

• Internally developed leaders preserve corporate culture.

• Internal candidates can hit the road running, because they know the organization, its people, and its pro- cesses. Other employees know the internal candi- date, and there is less internal disruption waiting to see who the new executive is and what changes he or she will make. Internally chosen executives do not replace those who report to them as often as external candidates do; externally chosen can- didates often get rid of the “old guard.”

• Recruitment and selection costs are lower. For example, the replacement cost of a CEO is estimated to be $750 000, including the use of a search firm and lost opportunities getting the external candidate up to speed. Additionally, internal candidates do not have to be compen- sated at the higher levels demanded by external candidates (who face the risk of starting in a new organization).

Advantages of External Candidates

• The external candidate may have better skills to lead the organization through a major transforma- tion or change in strategy.

• The external candidate brings new knowledge and skills to the organization and prevents the organi- zation from becoming inbred and stale.

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have been seen as a personnel function, which incorporated little understanding of the real needs of the organization. Thus, managers may not have bought into the process.

In a succession management approach, several raters give current evaluations on an employee’s performance. The increasing use of 360° feedback mechanisms sheds light on various aspects of any candidate’s style and performance. HR Planning Notebook 7.4 compares replacement planning and succession management.

SUCCESSION MANAGEMENT PROCESS The succession management process links replacement planning and management devel- opment. Until recently, in some organizations, succession planners worked with one database, management trainers with another. Now, both databases are integrated, with succession managers working in strategic planning committees, performance manage- ment groups, and organizational learning and training functions.

The succession management process is simple to understand but difficult to imple- ment. The process involves five steps, each of which we will now consider in some detail.

1. ALIGN SUCCESSION MANAGEMENT PLANS WITH STRATEGY

Management development must be linked to business plans and strategies. If the busi- ness plan focuses on global markets, then managers have to be trained to manage global businesses. How does this translate into everyday skills? To build global talent, an organization could start by asking these questions: What are the specialized skills and perspectives necessary to compete globally? How many managers possess these skills? What percentage of employees could represent the firm to the world? How many could have an extended dinner with key international customers?22

The strategic connection is important, so organizations must start with the business plan. Using this, coupled with environmental scanning, managers try to predict where the organization will be in 3, 5, or 10 years.

A manager rates the potential of an employee.

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NEL 173CHAPTER 7 Succession Management

2. IDENTIFY THE SKILLS AND COMPETENCIES NEEDED TO MEET STRATEGIC OBJECTIVES

From the strategic plan, managers can then develop a list of the employee skills and competencies needed. There are at least two approaches to identifying the charac- teristics of successful managers: the job-based approach and the competency-based approach.

JOB-BASED APPROACH The first impulse is to start with the job. We know that employees have jobs with duties and responsibilities. The job-based approach suggests that employees who have significant experience as managers, and who have acquired job skills such as motivating, delegating, marketing, or managing finances, will make suc- cessful managers.

Others suggest that this job-based approach to successors is inadequate because jobs change rapidly. Furthermore, the increase in knowledge work has led many orga- nizations to search for a different approach to employee development, particularly for those employees at the managerial level. Therefore, many organizations are turning to a competency-based approach, in which the capabilities of individuals are the primary focus.23

COMPETENCY-BASED APPROACH Competencies are groups of related behaviours that are needed for successful performance.24 A competency can comprise skills, abilities, knowl- edge, and personal characteristics (ability to motivate others, for example25). Competencies are measurable attributes that differentiate successful employees from those who are not. These competencies are a collection of observable behaviours and can be “hard” or “soft.”

HR PLANNING NOTEBOOK 7.4

COMPARISON OF REPLACEMENT PLANNING WITH SUCCESSION MANAGEMENT

FACTORS PLANNING MANAGEMENT

Environment Stable Dynamic

Focus Jobs Strategy

Time frame 6–12 months 2+ years

Selection criteria Job experience Competencies

Appraiser Immediate manager 360° feedback

Selection pool Internal Internal and external

Successors Slated individuals Talent pools

Development Limited Flexible, multiple

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Hard competencies might be the ability to build new technologies. Soft competencies might be the ability to retain top talent.26 Given an uncertain future in which skill needs change rapidly, succession management should focus on the development of competencies.

Consulting firms are the perfect example of companies in which the skills and capa- bilities of individuals drive the business, and business opportunities drive the develop- ment of new capabilities. Thus a list of skills (rather than jobs or positions) forms the basis for succession management. Rather than moving up a career ladder, individuals move through a certification process, developing increasingly complex capabilities along the way. There may be several skill acquisition paths, rather than one sure path to the top.

A good place to start preparing a list of competencies is to look at what experts have said about the competencies of successful managers. Many lists are available that outline the kinds of generic skills and competencies managers should possess. HR Plan- ning Notebook 7.5 presents a list of these characteristics.

The skills that managers need to possess are endless, and each “expert” develops a pre- ferred list. These lists could be used as a starting point and then be customized to identify and develop managers in any organization. By emphasizing competencies rather than job skills, individuals will be more flexible in adapting to changing organizational needs. (“Skills” and “competencies” are terms that are often used interchangeably. However, skills are narrower and refer more specifically to skills for one job; competencies are broader and can be applied to many jobs at many levels. For example, proficiency in PowerPoint and installing Windows are skills; the abilities to think creatively and work in teams are competencies.) Catano and his colleagues provide a full discussion of competencies; they distinguish between several types:

• Core competencies: Characteristics, such as thinking skills, that every member of the organization is expected to possess

• Role or specific competencies: Characteristics, such as business knowledge, shared by different positions within an organization

• Unique or distinctive competencies: Characteristics, such as expertise in media relations, that apply only to specific positions within an organization27

HR PLANNING NOTEBOOK 7.5

MANAGERIAL COMPETENCIES

• General mobility skills and knowledge: These competencies facilitate reemployment and include effectiveness in group process, communication skills, and flexibility and adaptation.

• General managerial core competencies: These com- petencies were identified by studying successful managers and include “being able to build a cohe- sive team” and “being able to persuade employees to accept much needed organizational changes.”

• Detailed, job-specific competencies: Job-specific competencies vary by function, but in HR would include “the ability to implement a change pro- gram” and to “identify the best selection tool to identify high-potential candidates.” These abilities would vary by level, with a junior manager mas- tering the ability to identify performance gaps in a subordinate and a senior manager being able to initiate change programs to improve performance.

Source: Adapted from E.H. Burach, W. Hochwarter, and N.J. Mathys, “The New Management Development Paradigm,” Human Resource Planning, Vol. 20, No. 1 (2000), pp. 14–21.

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3. IDENTIFY HIGH-POTENTIAL EMPLOYEES

After we know what competencies are needed, we can turn to the identification of employees who might ultimately acquire these sets. Regularly scheduled discussions about succession force the leaders of the organization to think about the future of the business and the kinds of employee skills needed to facilitate the chosen strategy. By concerning themselves with the future directions of the organization, executives focus on the managers who will guide that future. The performance appraisal process becomes meaningful and not just another personnel form to complete. Executives come to “own” the succession and development plans, because they are integral to the success of the organization.

In HR, we often state that the best predictor of future performance is past per- formance. Executives must be able to move beyond descriptions of high-potential employees that use descriptions such as “She is very bright and very strategic” and “He has the support of his team” to listing specific achievements.28

Organizations use several approaches to identify managerial talent, including the following:29

1. Temporary replacements: At the most primitive level, most individual managers will have identified a designated backup and potential successor. This is done in case the manager is away from the office for extended periods (e.g., vaca- tions, training). A manager who fails to pick a successor may never be pro- moted, as no replacements would be ready to succeed him or her.

2. Replacement charts: At the next level, some organizations prepare replace- ment charts with predicted departure dates of the incumbents, along with a shortlist of possible successors. This is usually done around performance appraisal time, using the performance evaluation data. Typically, a handful of senior executives targets a diverse list of employees for growth and cre- ates annual development plans. These executives stay in touch with each individual assigned to them and become responsible for the development of the leadership competencies of those individuals. The list identifies those candidates who are ready now, those who will be ready in three to five years, and the long shots. These approaches tend to replicate current strengths (and weaknesses) and are not necessarily future oriented, nor are they strategi- cally aligned with the needs of the business. This stair-step approach is too rigid during times when organizational structures are changing rapidly and employee loyalty is weak.

3. Strategic replacement: A more advanced succession management program exists in an organization that is less inclined simply to replicate existing incumbents, but instead identifies the leadership competencies it needs, on the basis of organizational plans. The organization then tries to support and train these managers from within. The identification of high-potential people moves beyond the evaluations conducted by one or two managers. The Public Service Commission of Canada, for example, uses a formal assessment centre to identify those public servants who will become the future executives in the federal public service. Wary of evaluations done by only one individual with one perspective on employee performance, many organizations are moving to a 360° evaluation. For many employees, such an evaluation is the first time they have received feedback on how others perceive them. Some employees have likened the experience to holding up a mirror, others to a breath of fresh air.30 Employees who had undergone 360°

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NEL176 Strategic Human Resources Planning

feedback reported that they felt their peers often knew better than their man- agers how to improve their performance.

The above three systems favour the selection of internal candidates. As a result, these systems have a motivating impact on employee performance. However, they are limited in their ability to introduce new ways of thinking and working, and may not suit the strategic direction of the organization. In the next approach, the managers more actively scan the environment to identify and retain top talent.

4. Talent management culture: Many organizations, whose CEOs lie awake at night worrying about their ability to find and keep top talent, have adopted a talent management culture.31 The winners in the war for talent have developed a talent mindset—that is, they believe that talent matters and it must be devel- oped not only at the top level but also at all levels. Managers are committed to define and model an employee value proposition that answers the question, “Why would a talented person want to work here?” The employee “brand” is managed as much as the company brand. The organization wants its reputa- tion (i.e., its brand) to be one where current and future employees believe that it is a great place to work based on attributes that candidates desire. See HR Planning Today 7.1 for a discussion of brand positioning to attract and retain employees. Organizations with employer brands outperformed others in three critical areas: revenue, net income, and share price.32 Managers actively scan the environment (e.g., for the actions of their competitors or the actions of the world’s best industry leaders in other areas with overlapping functions, such as finance or logistics) looking for external talent. They have developed both internal and external lists of high-potential candidates.33

Those with a talent management culture use conferences to identify top talent.

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NEL 177CHAPTER 7 Succession Management

Recruitment is opportunistic—that is, when a top candidate is found, that person is hired regardless of whether there is a vacancy. For example, MDS is so interested in securing talent that it will hire even when no position is open, and make that person an “executive-in-residence” and give him or her a special project to manage until a vacancy arises.34 As David Guptill, vice-president of HR for Lafarge Canada, a large supplier of construction materials, states:

What keeps me awake at night is my very thin bench strength. … We are resisting that temptation to scale back on strategic recruiting. And when I say stra- tegic recruiting, what I mean is that you don’t wait for a vacancy and the predicted retirees. I and our senior managers are always on the lookout for talent that may be available. If I find a very talented person … my freedom is to go out and hire that person whether we have a vacancy or not.35

The process of continually searching for talent is correlated with success. A McKinsey study found that nearly one-third of HR directors at top-performing companies constantly search for talented executives, contrasted with less than 10 percent at average-performing companies.36 These talent management companies analyze turn- over statistics and always include in their reports the reasons for the voluntary turnover. Managers, not HR, have the responsibility for identifying and cultivating talent.

Finally, some companies operate with all four approaches, using replacement plan- ning for highly predictable jobs such as accounting, and talent management to deal with rapid changes in strategic needs.

Assessing employees to identify high-potential candidates must be done both fairly and accurately: fairly so that employees buy into the process and feel that the search for talent is an equitable procedure, and accurately so that the selection process is both reliable and valid. Organizations typically use the direct supervisor’s informal judgments and formal evaluations such as performance appraisals and assessment centres. (More information can be found in the performance evaluation chapter of any introductory HRM text.) Caterpillar’s annual talent assessment includes the employee’s manager, the business unit manager, and the executive office. The discussion centres on the employee’s

HR PLANNING TODAY 7.1

BUILDING THE BRAND: AN EMPLOYEE VALUE PROPOSITION

Some companies develop an employee value proposition (EVP) that will help attract and retain employees. They base this EVP on concepts that they have learned in customer attraction and retention. An EVP is a brand positioning aimed at employees so that the company will be seen as an employer worth working for, and all company messages sent to the labour market are compelling and consistent. Key candidates seem to be attracted to companies that pose one of four brand positions:

• A “winning” company, which is characterized by growth and development

• A “big risk, big reward” company, which offers great potential for advancement and compensation

• A “save the world” organization, which is attractive to those wanting a mission

• A “lifestyle” company, in which employees want flexibility and a good relationship with the boss

Sources: S. Cliffe, “Winning the War for Talent,” Harvard Business Review, Vol. 76, No. 5 (September/October, 1998): pp. 18–19; and S. Hood, “The PR of HR,” HR Professional (February/March 2001): pp. 17–21.

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NEL178 Strategic Human Resources Planning

next three moves and the kinds of career experiences needed for these moves.37 HR Planning Notebook 7.6 contains a brief description of common assessment methods. Usually about 10 percent of employees are identified as high potential. Syncrude Canada Ltd., an oil producer, with headquarters in Fort McMurray, Alberta, has identified about 8 percent of its 3600 employees as high potential.38

However, the use of annual reviews of talent can result in a mechanical approach leading to the goal of completing the forms provided by HR, rather than quality dia- logues about leaders. Some managers simply update forms to meet a deadline. A better process would be to commit to quarterly reviews and the allocation of one full day to choose the top candidates by ranking them against all other candidates. Even these discussions can become politicized when:

• Executives rate their own candidates too positively • People are hesitant to criticize the choices of others • Members distrust the motivation of others’ recommendations (“passing the

trash”) • Running conflicts between executives result in cheap shots about candidates • Information about the best players is withheld as executives want to own this

talent

HR PLANNING NOTEBOOK 7.6

TECHNIQUES FOR ASSESSING EMPLOYEE POTENTIAL

• Performance appraisals: Managers identify high-potential employees through performance appraisal systems. Raters, who may include the supervisor, colleagues, customers, and subor- dinates of an employee, evaluate the employee against some pre-developed standards. The goal is to identify and communicate the employee’s performance strengths and weaknesses. The information is then used for developmental pur- poses so that gaps in performance can be closed. High-potential employees are tracked in this way using a standardized organizational assessment tool. Managers are forced to identify high-poten- tial employees through performance appraisal systems and may be rewarded for developing employees.

• Assessment centres: Assessment centres involve a process by which candidates are evaluated as they participate in a series of exercises that closely resemble the situations faced on the job. Simula- tions include negotiating a merger, handling the press, managing interdepartmental conflicts, or making a decision without all the facts. Trained

and experienced managers observe the candi- dates’ behaviour during this process and provide an evaluation of their competence and potential. The newest form of assessment centre is the acceleration centre, in which the first stop is a website where candidates learn about the ficti- tious company they will manage for a day. All testing, correspondence, and decisions are com- pleted online, enabling the assessors to compare candidates more objectively.

• Human Resources Management Systems (HRMS): Large amounts of information about employees’ KSAOs can be stored in databanks and used to identify employees with needed skills. Employees’ files can document their experiences, skills, abili- ties, and performance evaluations. Employees’ interests and career objectives may also be recorded. Basic matching to identify high-poten- tial candidates is simplified with an effective HRMS. A useful feature of an HRMS is its ability to construct scenarios. Planners can create “what if?” models to determine the effect of employee movements.

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To minimize the politics involved in identifying talent, management should develop a set of principles such as “Talent is managed in the larger interests of the company. Managers are simply stewards of this talent, and companywide interests prevail.”39

4. PROVIDE DEVELOPMENTAL OPPORTUNITIES AND EXPERIENCES

Before we discuss the methods used to develop managers, we should first consider two issues:

• Are leaders born or made? • Should organizations produce their own managerial talent or buy it on the

open market?

Born or made? Many great leaders have had no formal management training. Shouldn’t we just select leaders with the inherent qualities of leaders and not try to teach leadership skills?

Peter Drucker, considered by many to be the founder of management as a discipline, is credited with saying, “Most managers are made, not born. There has to be systematic work on the supply, the development, and the skills of tomorrow’s management. It cannot be left to chance.”40

Buy or make? Organizations invest many dollars and other resources to develop managers, but perhaps experienced, trained managers could simply be hired from other organizations. One survey found that more than half of the companies need to hire an outsider because no insider has been developed to assume the CEO role.41

Some organizations do prefer to pick up their needed executive talent by buying it on the open market. For example, Elliot Whale, president and CEO of Dylex Ltd., had been president of Toys “R” Us (Canada) and director of player personnel for the Toronto Blue Jays baseball club before he moved to Dylex. Selecting outsiders allows companies to bring in fresh perspectives, people who can lead the organiza- tion through a transformation. By bringing in an outsider, the board of directors sends a strong message to employees and shareholders that the old way of doing things is going to change.42 Other organizations feel strongly that they want to indoctrinate and train their own leaders, who then have a deep commitment to the organizational vision.

There are no easy answers to these questions. Organizations may find outstanding leaders by chance, or they may commit to the development process. Some may choose to hire from the outside to obtain fresh approaches; others will commit significant time and money to train their own managers. However, most large organizations have a policy of promotion from within. There are many advantages to this: the organiza- tion has accurate records of employees’ past performance, and employees understand and are committed to organizational objectives, know the ropes, and know how to get things done. Some estimate that one-third to one-half of new CEOs fail within the first 18 months. Newcomers apparently fail at understanding the political situation or overestimate an organization’s willingness to change (often the core reason that they were hired).43 Another reason to recruit internally is that CEOs recruited from the outside delivered annual returns 3.7 percent lower than insiders.44 Plus, external hires are paid about 18 percent more than internals, with little evidence that they produce better results.45 Most large organizations have formal management development pro- grams to ensure a ready supply of “promotables.” Let us look at some of the methods such organizations use.

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MANAGEMENT DEVELOPMENT METHODS In the succession management process, the focus in management development is on the development of competencies, not just on job preparation. Because the goal is to develop many skills that may be needed in an uncertain future (in contrast to simply replicating the skills of the present incumbents), management is much more open to various approaches to develop the talent pool. More traditional approaches might have relied on a senior leadership course and one developmental assignment, perhaps mimicking exactly what the current CEO did. The key point is that the approach has changed from one of providing training to fill jobs to one of providing experiences to realize leadership potential. The most common development methods are promotions, job rotations, special assignments and action learning, formal training and development, and mentoring and coaching.

PROMOTIONS A promotion refers to an employee’s upward advancement in the hierarchy of an organization and usually involves increased responsibilities and compensation. Traditional models of management development saw managers moving up a pyramid, managing larger and larger units until they reached their appointments at the top. Each organization had its favourite route to the top, some through sales, others through operations. These paths became worn over time, and few succeeded by using other paths, such as an HR track. One organization used a system of temporary rotations, resulting in a win-win combination. Senior executives nearing retirement were given the option of a week’s vacation in every month, which they welcomed, and were replaced by high-potential employees who could try new leadership skills in a safe setting. In flat organizations, where promotions are rare, a preferred developmental method is job rotations—developing managers horizontally rather than vertically.

JOB ROTATIONS Job rotations are lateral transfers of employees between jobs in an organization. Rotations involve a change in job assignments but not necessarily more responsibility or money. For example, one way of orienting a new employee quickly is to place him or her in a new department every few weeks, providing an overview of the organization. The CEO of Maritime Life Insurance believes that rotation is the best indicator of whether an employee is ready for a top position. To avoid costly placement decisions, staff with potential are placed in a variety of roles across the organization. Succeeding at rotation is a prerequisite for a top-level position.46

Rotations have several motivational benefits for employees, including the reduction of boredom and fatigue. Trying out new jobs also benefits employees who have reached a career plateau. The development of additional skills may increase an employee’s job and career prospects. Almost all the research suggests that job rotation makes employees more satisfied, motivated, involved, and committed.47

From the organization’s standpoint, rotations are useful for orientation and career development. Rotations allow an employee to increase his or her experience. A common use of job rotation is to take a functional specialist, such as an accountant, and rotate this specialist through both HR and operations in preparation for management posi- tions. An information technology specialist, before a rotation in sales, might try to sell his idea to management by saying, “We have to invest in a multiprotocol router,” and might be met with complete incomprehension. After a rotation through the sales depart- ment, the same specialist might sell the same program by explaining, “We’re building an infrastructure so that salespeople can access product or inventory information from anywhere.” The technician has learned a business skill.48 Jet Form, an Ottawa-based business with about 650 employees, uses cross-functional mobility as a key part of its

Promotion An employee’s upward advancement in the hierarchy of an organization

Job rotations A process whereby an employee’s upward advancement in the hierarchy of an organization is achieved by lateral as well as vertical moves

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NEL 181CHAPTER 7 Succession Management

strategic planning.49 The results are encouraging, and employees are regularly rotated between functions to increase their knowledge and skills.

Besides the additional knowledge of the functional areas, such as sales, and man- agement areas, such as business knowledge, the rotated employee is making contacts and establishing a network that might prove useful in the future. Learning new ways of doing things, with different co-workers and bosses, also might make employees more adaptable in their managerial jobs. The research shows that rotation improves an employee’s knowledge of the organization (e.g., of business, strategy, and contacts) and improves his or her ability to cope with uncertainty. Furthermore, employees who have tried out several jobs gain a better insight into their own strengths and weaknesses. However, job rotation produces generalists and should be supplemented by training for any specific skills needed.

Of course, the downside of employee rotations includes the increased time needed to learn the new jobs, the cost of errors while learning, and the loss of efficiency that otherwise is gained through repetition and specialization.50 In other words, workload may increase for the employee while productivity decreases, and other employees absorb additional work and stress in efforts to socialize, orient, and train the newcomer.

At the managerial level, employers should be concerned about producing a short- term orientation in the organization’s leadership ranks. Employees in six-month jobs may put their efforts into creating fast results, which might hurt the unit in the long term. For example, employees with a short-run focus may neglect plant safety in a rush to exceed production quotas. Furthermore, the rotation of managers places new expectations on performance, creates new goals, and results in reassignment of work, producing stress on the unit managed by rotation.51

One approach is to give an employee a number of assignments within the company or a related sector. Ultimately, managers may be better formed by developing skills horizontally, throughout an organization, rather than by developing specialized skills vertically, up a career ladder.

SPECIAL ASSIGNMENTS AND ACTION LEARNING On-the-job learning is still a favoured path to the development of managerial skills. Most organizations test high-potential employees by giving them an assignment in addition to their regular duties. For example, the manager of corporate banking might be placed on a task force that is considering the acquisition of another bank. A manager who needs international experience might be sent to work in China with a vendor to the company. In another case, a team of managers might be given a special assignment, such as developing an equity plan for the organization or developing an e-commerce plan for the company. These types of special projects enable candidates for future executive positions to network and test their skills in new environments. Mistakes must be tolerated, as candidates may quickly assume that these special assignments are synonymous with failure, fostering a culture of fear in which no employee dare be innovative or take bold measures, and, finally, derailment from the fast track. Recognizing the value of experience, even negative ones, is important. For example, there is a story about the executive called into his boss’s office expecting to be fired because of a business decision that cost the company a mil- lion dollars. The CEO instead gives him another special assignment, reasoning, “Why should we fire you? We just invested $1 million in your development.” Interviewers for executive positions routinely ask candidates about a difficult challenge or unsuccessful project. If the candidates indicate no failures, the executive search firm concludes that the candidate is not open about these experiences, or he or she may not have the skills

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NEL182 Strategic Human Resources Planning

to handle an unsuccessful project in the next assignment. The best assignments are those that entail a high degree of risk and accountability, such as launching a new busi- ness or turning around a struggling project. If these are coupled with decision-making authority and the opportunity to manage a large group of people, this is a recipe for producing effective executives.

FORMAL TRAINING AND DEVELOPMENT Management training and education is big business. Hundreds of thousands of dollars may be spent preparing one executive to become the CEO of the organization. This cost appears relatively minor when it is estimated that the total career investment in an individual employee is 160 times the initial starting salary.52 In this book, we use the term management development, but others label a similar process executive education or leadership training or a combination of any of these words.

The majority of companies use traditional and passive instructional techniques and rate them least effective, but they are fast and easy to use. Most use lectures, seminars, and discussion groups more often than behaviour modelling and experiential learning.53 Senior managers need the soft skills of delegation and motivation, rather than hard technical skills such as website development or benefits management. Thus, we would recommend that role-playing, case studies, behaviour modelling, and action learning, which are effective techniques, be used as training methods for management develop- ment. Through case studies and action learning, the courses offer managers a chance to practise and receive feedback. Unlike professional athletes or musicians, managers seldom get a chance to practise their skills and try out new ideas and methods.

MENTORING AND COACHING Many very successful managers explain that their successes resulted directly from having been mentored: A senior executive took an interest in them and their careers at a critical time in their lives. Mentors are executives who coach, advise, and encourage junior employees. The mentor takes an active interest in the career advancement and the psychosocial development of the protégé. Career development aspects include examining approaches to assignments and learning how tasks should be handled, which conferences or networks have high career value, and which senior managers to emulate. Psychosocial considerations include building the self-confidence of the protégé, as well as offering counselling and friendship to make him or her aware of the political open doors and open pits of the organization. Studies show that pro- tégés do indeed derive these psychosocial benefits (increased confidence, self-esteem, reduced feelings of isolation etc.) as well as career benefits (increased compensation, promotions, career development opportunities etc.).54 One company offers coaching to help high-potential candidates understand the executive derailers—those personality traits that might cause an otherwise effective executive to fail (such as arrogance, micro- management, risk aversion, volatility, and low tolerance for ambiguity).55

Mentoring used to happen informally, but organizations have recognized the value of having a senior manager take a career interest in a junior employee and so have started formal mentoring programs. One survey showed that 70 percent of highly productive organizations have mentoring programs, and employees in these programs report greater career satisfaction and experience faster career growth.56 These programs link execu- tives who have the motivation and time to nurture managerial talent with employees who are motivated to advance quickly. Two-thirds of the top-performing companies provide high-potential employees with frequent access to the CEO, and opportunities to interact on projects with senior managers.57 Mentors are almost always more senior people who volunteer to be mentors within an organization, while coaches tend to be

Mentors Executives who coach, advise, and encourage junior employees

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NEL 183CHAPTER 7 Succession Management

paid counsellors from outside the organization. Internal mentors are best for strength- ening and assuring continuity of organizational culture.58 The advantages of external coaches are described in HR Planning Notebook 7.7. Closely related to mentoring is sponsorship. In one study of the careers of CFOs, many described the importance of a sponsor, a manager who provided a critical opportunity on the career journey.59

While it is necessary for discussion purposes to separate management development methods, all companies will use a combination of methods. Some focus on formal pro- grams, such as a three-week leadership course followed by an assignment in a foreign country. Other companies, such as 3M, allow their employees to choose assignments and to work on ad hoc committees to manage new projects, as well as giving them free time to tinker and play with ideas. Cisco, a leader in hardware and software technology, uses the 3E Model: 70 percent of development occurs through Experience (assignments, rotations, and special projects), 20 percent through Exposure (feedback, mentoring, and shadowing), and 10 percent through Education (readings, e-learning, and courses).60 The choice of a method depends on the employee’s learning style and the goals to be achieved. Learning about foreign cultures is best done by spending time in a foreign office or with representatives from overseas, not from a book; nor is shadowing an IT employee the best way to learn about IT.

Table 7.1 outlines the most common leader development activities, and how HR managers rate their effectiveness.

Some companies follow these processes but press the fast-forward button for can- didates to intentionally accelerate their development. These candidates are part of an acceleration pool and

• Obtain assignments that offer the most intense learning and high visibility • Spend less time in assignments

HR PLANNING NOTEBOOK 7.7

BENEFITS OF EXTERNAL COACHES

Sources: Adapted from L. Hyatt, “Best Practices for Developing Great Leaders,” Workplace Today, January 2003: 14–17; and G. Voisin, “When to Use an Internal or External Coach,” HR Professional, June/July 2001: 30–33.

FOR THE ORGANIZATION FOR THE INDIVIDUAL

Retain high performers with incentives other than financial rewards.

Reconnect the individual with personal values or missions.

Develop key employees for succession planning. Provide clarity and focus to accelerate the achievement of goals.

Guide individuals and organizations through transition. Compress learning time to optimize skills by building competencies faster through one-on-one coaching.

Change skills and attitudes for long-term sustainable results.

Translate leadership theories and concepts into “useful insights” to affect communication, decision making, and overall strategies.

Give new perspectives on business experience and practices.

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• Are given stretch assignments • Receive more training • Are given developmental activities designed especially for them • Are assigned a mentor • Are not guaranteed promotion61

Companies that do this well are called “academy companies”—a kind of executive finishing school—known for breeding the best leaders. In Canada, these incubators are PepsiCo, IBM, General Electric, Procter & Gamble, Petro-Canada, and Manulife Finan- cial.62 Headhunters go to these companies to poach new leadership blood. These top companies for leaders offer many benefits, as outlined in HR Planning Notebook 7.8. Does this mean that companies risk losing leaders if they invest in them? Not neces- sarily, according to research by Canadian professors Jack Ito and Celeste Brotheridge, who concluded that supervisory support for career development strengthens employee’s intentions to stay.63 Generally, providing opportunities to grow and develop new skills is seen as a good retention tool.

Another reason for using different methods is that the development of a senior executive may take 25 years. It is unusual to see a vice-president of a large company who is younger than 40 years old. So some companies, such as Walmart, start early, grooming the store managers under a mentoring system to take on more and more responsibility.

USE % VERY

EFFECTIVE % MODERATE OR EXTENSIVE USE

Special projects within one’s own job responsibilities

77 69

Special projects outside one’s own job responsibilities

46 55

Expatriate assignments 26 54

Coaching with internal coaches or mentors 48 45

Formal workshops 85 42

Coaching with external coaches or mentors 28 42

Articles/books 65 27

Tests, assessments, or other measures of skills 52 26

Computer-based learning 38 16

Notes: Leaders rated effectiveness; HR professionals rated usage; table made from bar graph. Source: Bernthal, P. & Wellins, R. 2006, “Trends in Leader Development and Succession,” Human Resource Planning, Vol. 20, Issue 2, p. 35.

TABLE 7.1

USE AND EFFECTIVENESS OF LEADER DEVELOPMENT ACTIVITIES

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5. MONITOR SUCCESSION MANAGEMENT

Some succession plans are placed on an executive’s top shelf, ready to be dusted off to pre- pare for the annual discussion. They do not form part of a strategic plan, nor are they used to guide employee development. To measure the effectiveness of succession management, succession planners used to count the number of predicted “high-potential replacements” with the actual number of those placed in the position. (For example, in Canada, organiza- tions have reported that they have 0.59 designated job-ready or nearly ready successors for every senior executive position.64) However, if the needs of the business change dramati- cally, this may be a poor way of measuring. Others suggest measures such as the following:

• Increased engagement scores • Increased positive perceptions of development opportunities • High-potential employees’ perceptions of the succession management process • Higher participation in developmental activities • Greater numbers involved in the mentoring process65

Nevertheless, there are internal ways to judge whether a succession management program is successful, including HR metrics, which may be viewed as lag measures such as the following:

• Increased average number of candidates for key positions • Reduced average number of positions having no identified successors • Increased percentage of managers with replacement plans • Increased percentage of key positions filled according to plans • Increased ratio of internal hires to external hires in key positions • Increased retention rates of key talent • Increased percentage of positive job evaluations after promotion

HR PLANNING NOTEBOOK 7.8

ACADEMY COMPANIES

Academy companies offer these experiences to become top companies for leaders:

• Working abroad/international experiences • 360° feedback to assess and critique leadership

attributes, skills, and traits • Assessment centre solely for leadership develop-

ment of high potentials • Mentor with admired senior leader • Rotational job assignments

• Spending 10 percent to 24 percent of top leader- ship’s time on talent management issues

• Organization has special/different career develop- ment process to retain high potentials

• Organization prepares specific development plans for high potentials

• Organization makes lateral moves attractive to high potentials

Source: Donlon, J.P. 2007, “Best companies for Leaders,” Chief Executive, December 2007, 230, pp. 58–62.

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NEL186 Strategic Human Resources Planning

• More positive assessment of the quality of preparedness for new roles • Increased number of bosses skilled as talent developers66

The above measures need benchmarks, perhaps simply improvements over the previous year for the organization. For example, one benchmarking organization suggests that effec- tive organizations have 1.6 candidates for each key role.67 However, one study found that the single most important driver of an effective plan was that the executive team modelled the behaviour, believed in it, and held managers accountable (in performance reviews and bonuses) for developing employees. Top-performing companies allocate 20 percent of execu- tive bonuses to leadership development and assess them on the ability to retain this talent.68

One expert asked, “If this process worked perfectly and everything happened the way it was supposed to happen, what would the results look like?”69 The answer? Employees would receive regular feedback based on the assessment process and would participate in develop- ment plans. The best result would be an organization with skilled employees prepared to contribute to the goals of the organization under changing conditions. Organizations mea- sure their success not only by the percentage of positions filled by designated high-potential employees but also by attitude surveys of these employees, as well as exit interviews if these high potentials leave the organization. The word “success” in succession is illuminating in that studies are starting to show that corporations with strong succession management pro- grams are higher performers measured by revenue growth, profitability, and market share.70

Another international study surveyed thousands of leaders, employees, and HR staff from 117 organizations in 14 countries and identified the following characteristics as critical to perceptions of succession management effectiveness:

• A timeframe for achieving planned action • Flexible adjustments to changes in strategic plans • The sharing of information about the nomination process performance and

rankings with identified candidates • Visible support from top management • The involvement of line management in the identification and development of

candidates.71

So far, we have examined succession management from the organizational perspec- tive. We will now consider the employee’s perspective.

EMPLOYEE ROLE IN SUCCESSION MANAGEMENT A top-down, organization-directed approach to succession management assumes that employees are ready and willing to be prepared for the next generation of leadership. A top-down approach treats employees as pieces in a chess game. But employees are not pawns; their voices need to be heard.

The first consideration is that an employee’s relationship with any organization is not permanent. The employee can quit, or the employer can terminate him or her. Today’s new employ- ment contract does not guarantee jobs to anyone, even to those performing competently. The former contract was built on an implied promise of a long-term, mutually satisfying relationship. However, market forces create turbulence that sometimes causes companies to restructure or fail. These changes have resulted in a change in the psychological contract that an employee has with

An employee has a responsibility to update her skills as part of her own career planning.

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.c om

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NEL 187CHAPTER 7 Succession Management

the employer. The traditional employment contract with the organization was built on an implicit understanding that the employee would work hard, would develop additional skills provided mainly by the employer, and, in return, would be promoted on a regular basis. At a minimum, the employer would reward the loyalty and efforts of employees with job security. This contract is dead. Today’s career model may be perceived as a transactional one in which benefits and contributions are exchanged for a short period.72 The new contract, transactional in nature, lists the responsibilities and rights of each party in the employer–employee relationship, and employees want this contract stated explicitly in writing. If loyalty to any organization still exists, it is to the professional organization, to a network of peers, and to certifiable credibility that confers collegiality and respect. HR Planning Notebook 7.9 contains a comparison of the two concepts of career management.

This transactional view of employer–employee relationships suggests that as organi- zations develop employees, they must take into consideration employee aspirations and goals. Employees will participate in management development programs more eagerly if their goals match the succession plans of the company. Employees will enthusiasti- cally engage in self-development if they are aware of the strategic goals of a company, thus enhancing their own job security or marketability. If, for example, employees of any retailer understood the changing nature of their declining retail business (from the increased competition of online retailers such as Amazon), they would develop skills such as geo tracking and logistics, and knowledge about the impact of the complete consumer

HR PLANNING NOTEBOOK 7.9

COMPARING TRADITIONAL AND EMERGING CAREER MANAGEMENT CONCEPTS

Sources: Adapted from D. Hall and J.E. Moss, “The New Protean Career Contract: Helping Organizations and Employees Adapt,” Organization Dynamics, Winter 1988, pp. 22–37; and E.F. Craig and D.T. Hall, “The New Organizational Career: Too Important to Be Left to HR?” Reinventing HRM: Challenges and New Directions, R.J. Burke and C.L. Cooper, eds. (New York: Routledge, 2005).

CHARACTERISTICS TRADITIONAL EMERGING

Employment contract Implicit Explicit

Duration Long term Useful term

Career responsibility Employer Self-directed

Career identity Organization Profession/occupation

Benefits Focus on security Focus on experience

Loyalty To the organization Profession, friends, family

Mindset Inward, political Outward, entrepreneurial

Development Formal training Work experiences

Career progression Vertical Horizontal

Employment stability Job security Employability

Role of manager Control/coordination Coach

Career goal Corporate success Meaningful contributions

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188 NELStrategic Human Resources Planning

experience. Managerial preferences cannot be the sole determinant in employee devel- opment. Career counselling and discussions at performance appraisal time will help ensure that the employee’s voice is heard. While organizations cannot promise life- time employment, competition for leadership talent is so intense that high-potential employees must be given a reason to stay with an organization.

An added benefit of listening to employees is the opportunity to customize the develop- ment plan. Employees are very aware of their strengths and weaknesses and their preferred learning styles. One employee might suggest that she could learn decision making by being given a leadership role; another might prefer a seminar on decision making. Some organiza- tions, such as Ford Financial, which has 20 000 employees around the world, provide infor- mation to employees that enable them to make their own career plans. Ford Financial has a sophisticated skill and competency-based learning program with direct links to the company’s three core businesses and job requirements. Employees can determine the skills and compe- tencies needed for any job within the organization, then undertake a self-development plan to master any of the 15 knowledge domains, 80 functional areas, and 800 separate skills.73

By creating a process that invites employee participation, succession managers are more likely to gain employee commitment to and ownership of the plans. We turn now to a discussion of the role of HR in this process.

MANAGING TALENT: THE HR ROLE Most researchers and consultants will argue that the CEO should own the succession management function, and that HR should simply provide some tools for doing so. But HR are professionals and know more about suc- cession management best practices (and pitfalls) than CEOs do. HR should own the talent management process in order to mitigate three types of risk to an organization:

1. Vacancy risk: Organizations that are unable to fill key vacant positions quickly with effective leaders may suffer business losses and/or an inability to move forward on strategic goals.

2. Readiness risk: HR must develop employees so that when opportunities arise, there are qualified and motivated personnel in place.

3. Transition risk: In addition to preparing employees for key roles, HR must develop programs to retain key employees, and to monitor competitors and others to be able to quickly identify external candidates.74

In order to manage these risks, HR promotes a culture of talent management, develops successors for all key positions, identifies gaps between current competencies and those needed in the future, and encourages development at all levels.

// SUMMARY In this chapter, we defined succession management and contrasted it with personnel plan- ning. The five-step model of effective succession management includes these steps: (1) align succession management plans with strategy; (2) identify the skills and competencies needed to meet strategic objectives; (3) identify high-potential employees; (4) provide developmental opportunities and experiences through promotions, job rotations, special assignments and action learning, formal training and development, and mentoring and coaching; and (5) monitor succession management. The employee’s role in the process must be considered. The HR function has to assume responsibility for the succession management process.

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189CHAPTER 7 Succession Management NEL

KEY TERMS job rotations p. 180 mentors p. 182 promotion p. 180 replacement planning p. 168 succession management p. 166

DISCUSSION QUESTIONS 1. Ganong Bros., a manufacturer of candy and chocolates, is based in St. Stephen, New

Brunswick. In 2008, for the first time in its 135-year history, an outsider succeeded a member of the Ganong family as president of the company. (Two children who work in the business were deemed “not ready.”) This decision is a result of two years of succession planning by the Ganong board, which is dominated by outsiders. What are the advantages and limitations of choosing an outsider to head the company?

2. About half of all Canadian companies offer paid leave to volunteer, ranging from one day to two weeks annually. According to Mario Paron, KPMG’s chief HR officer, “Employees return with a fresh perspective—new skills learned in a nontraditional environment and learning and sensitivity in dealing with people from different backgrounds, that is invaluable when they return to work.”75 Do you think that volunteering is a good management developmental tool? Why or why not?

3. This chapter has focused mainly on managers, implying that they are the key talent that needs to be managed. However, there are people who believe that the organization’s most critical employees are not those who make the highest salary, but those who have the most impact on the customer: for example, the couriers at FedEx and the street sweepers at Walt Disney World. Describe why these people should be considered key talent, and what succession management plans could be used for them.

EXERCISES Consider the following three scenarios:

1. Lee Ki Chung managed all the operating systems for 8 Star Manufacturing Company. Always reliable and never absent, Lee was indispensable. One day, Lee phoned to say that he had been diagnosed with cancer, had to enter treatment immediately, and did not know when he would return to the office.

2. The president of Overseas Banking Corporation, the second-largest bank in the country, had chosen as his successor the vice-president of finance. However, as the president’s retirement date approached, he began to worry that this star employee could no longer handle the stress and long hours of banking. The VP was absent for extended periods as he tried to deal with his son, who was a drug addict, which in turn caused problems in his marriage.

3. Hi Tech Corp is a company created by the next generation of Bill Gates clones. They had succeeded in attracting the best and brightest to help them build a billion-dollar company to develop the ultimate software applications. On Tuesday, October 10,

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190 NELStrategic Human Resources Planning

the entire design team announced they were quitting to start a rival company and recapture that entrepreneurial culture of the early years.

Could succession management have mitigated the impact on the organization of any of these situations? How could succession management mitigate the seriousness of the consequences?

CASE STUDY 1 THE PEOPLE DEVELOPMENT FRAMEWORK AT FORD OF CANADA

The North American automotive industry has been facing significant challenges in recent years as the “Big Three” restructure their operations to respond to increased foreign competition, difficult economic conditions, and shifting demand as con- sumers migrate toward more fuel-efficient vehicles. In light of these dynamic busi- ness conditions, Ford of Canada relies heavily on organization and personnel planning processes and tools to ensure that the organization structure, internal selection practices, and succession management systems are aligned to support the future needs of the firm and the needs of its employees. With a strategic focus on maintaining a “People Development Framework,” succession planning is a key element of the organization and personnel planning function.

The HR team reviews four major areas of focus in order to make better decisions about the organization’s future direction for personnel requirements. In addition to assessing the impact of external factors such as world events, the changing mar- ketplace, and workforce demographics, team members regularly review the opera- tional plans in place so that functional HR objectives and action plans are properly developed and aligned to meet the long-term goals of the business. Ongoing reviews of the organization structures are conducted to ensure that the delivery of the organization’s business priorities is achieved in an efficient, flexible, and affordable manner by assessing factors such as the size of the organization, the percentage of resources deployed at each level and function, and the attraction and retention potential of the leadership level and salary grade system. Lastly and most impor- tantly, the “people equation” is evaluated on an ongoing basis to ensure that the organization has the right people in the right positions at the right time to help the organization achieve success.

Personnel development committees (PDCs) play a central role within Ford of Canada to identify and match employee capabilities to key positions to ensure appropriate bench strength is in place. Committees exist for three broad levels of the organization including senior executive, business unit management, and line management, and PDC composition includes managers from all functional busi- ness areas to ensure cross-functional opportunities can be efficiently explored and utilized for employee development. In conjunction with department managers, PDC members are charged with the responsibility of identifying employees who demonstrate outstanding leadership abilities, strong and continual learning, and superior job performance, and then matching employees to key positions.

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PDCs assess candidate bench strength for particular key positions or job families using a visual aid called a “T” chart. Employees immediately qualified are plotted on the horizontal section of the “T” while employees with future potential who require further development are identified in rank order in the vertical region of the tool. Using a graphic aid such as a “T” chart allows review committees and managers to see and compare bench depth across key positions; it further assists in the communication process as succession planning information moves vertically to other PDCs as vacancies are being filled or when bench strength is being assessed.

An integral component of the People Development Framework is the engage- ment and participation of the individual employee in his or her own professional development and career management. With consultation from their immediate supervisors, employees are engaged in the process through the completion of a Leadership Development Employee Profile (LDEP) and an Individual Development Plan (IDP) on an annual basis. The LDEP acts as an internal résumé to capture individual employee information for PDC or hiring manager review that includes current position details, previous Ford position history, the employee’s viewpoint on Ford, and non-Ford key accomplishments, as well as preferred developmental assignments.

The IDP reinforces the need for each employee to invest in his or her own professional development and provides an opportunity for career planning activities to further develop strengths and areas of improvement in alignment with career goals and business needs. Plans are developed between an employee and supervisor that identify developmental actions that improve current assignment performance and also position the individual for his or her desired future assignments. While partnership with the supervisor is necessary for establishing the content and imple- mentation timing of an IDP, it is inherently critical that employees take personal ownership of the formation and maintenance of their own career plans for this tool to be successful.

As Ford of Canada business units strive to “do more with less” in a manner that delivers an efficient, profitable, and competitive position, an assessment of key position requirements and employee leadership and technical competencies is critical to ensure that employee developmental needs and placements support the delivery of the desired business outcomes. The process tools and governance structure under the People Development Framework serves to reinforce the inherent linkage and shared responsibility between employee, manager, and PDCs in the success of the organization and of individual employees.

Source: Case prepared by Ron Derhodge, Human Resources Manager, Parts Distribution Centre, Ford Motor Company of Canada Limited.

QUESTION Analyze the effectiveness of Ford’s succession management program. Include in your report the strengths and weaknesses of the model and suggestions for increasing its effectiveness.

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CASE STUDY 2 EXECUTIVE SUCCESSION MANAGEMENT PROGRAM AT EMEND MANAGEMENT CONSULTING

When company executives and boards need advisory services on succession, they sometimes seek external support from consulting firms such as EMEND. Ellie Maggio, CEO and Managing Director of EMEND, describes the necessary trans- formed interest of Boards and executives in succession planning:

Over the past decade, succession plans have really become important due to CEO departures leaving organizations scrambling. Moreover, heightened board governance and regulatory compliance have raised the bar on this important function. If succession plans are not implemented, shareholders may view their investment at risk.

At EMEND, when working with boards, a six-step process is used in developing executive succession management programs:

1. PLAN • Determine or clarify CEO and board expectations of the succession man-

agement process • Ensure top-level responsibility/accountability • Ensure plan is business oriented, pragmatic, and endorsed at the highest

levels

2. ASSESS • Review executive contracts for content related to succession plans and

how they may relate to development plans, performance plans, compensa- tion plans, termination, retirement, organization departure, and transition

• Review existing replacement plans, performance reviews, talent/high potential/development plans

3. STRATEGIZE • Engage executives in the development of the new/refined program • Ensure clear linkages to other programs related to risk management, talent

management, performance management, and compensation programs • Ensure the succession management method and process is reflective of

stakeholder requirements

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193CHAPTER 7 Succession Management NEL

4. DEVELOP • Create talent review criteria/competency models for executive and critical

jobs • Develop talent review tool(s) linked to the leadership development pro-

gram, performance management process, and executive compensation • Develop talent review process steps and timeline for implementation

5. IMPLEMENT • Conduct talent reviews (e.g., 180°/360° assessments) • Analyze talent reviews and link findings to criteria/competency models • Facilitate the process by using an electronic “talent skills inventory” • Communicate succession plans and ensure internal and external

transparency • Educate/train decision makers

6. TRACK AND MEASURE • Develop metrics to measure success of the new program. Metrics may

include but are not limited to: – Quality/readiness of potential leaders – Number of vacancies – Success rate of new executives – Executive assessment of new plan – Identification of potential leaders – Response and completion rate of plans – Ratings from employee satisfaction surveys

• Track success and make enhancements as required

Source: Correspondence with Ellie Maggio, CEO and Managing Director, EMEND Management, June 2011.

QUESTIONS 1. What steps might you include or remove from this process? 2. What additional techniques might be used to assess talent? 3. How would this process apply to non-executive succession planning?

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Focus, Vol. 87, No. 1: 1, 13–15. 68. Hewitt Associates Inc. 2005. 69. Borwick, C. 1993. “Eight Ways to Assess Succession Plans.” HRM Magazine,

Vol. 38, No. 4: 109–114. 70. Willins, R., and W. Byham. 2001. “The Leadership Gap.” Training, Vol. 38,

No. 5 (March): 98–106. 71. Bernthal, A., and R.S. Wellins. 2003. The Leadership Forecast: A Benchmarking

Study. Pittsburgh, PA: Developmental Dimensions International. 72. Hall, D., and J.E. Moss. 1988. “The New Protean Career Contract: Helping

Organizations and Employees Adapt.” Organization Dynamics (Winter): 22–37. 73. Greengard, S. 2001. “Make Smarter Business Decisions: Know What

Employees Can Do.” Workforce, Vol. 80, No. 11 (November): 42–46. 74. Lockwood, N. “Talent Management: Driver for Organization Success.” HR

Magazine, Vol. 51, No. 6 (June 2006): 1–12. 75. Lane, P. 2008. “Time Off to Save the World.” National Post (July 26).

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Describe the benefits of information technology (IT) solutions for human resource planning (HRP).

• Explain how different IT solutions can be leveraged to improve HR planning. • Identify specific IT applications for HR planning. • Understand what is meant by Big Data, and it implications for HRM. • Differentiate between HR metrics and HR analytics. • Understand how to use HR metrics and HR analytics to help solve business

challenges.

INFORMATION TECHNOLOGY FOR HR PLANNING

Portions of this chapter were adapted from a chapter written by Victor Y. Haines III.

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NEL 199CHAPTER 8 Information Technology for HR Planning

// IT AND HRM The HR department has always been the custodian of employee information. All forms that are completed by employees giving information about their education, training, and job experience are stored as data. These data can be used to locate employees for promotions or transfers, and help managers plan for labour shortages or surpluses. Obviously, using technology to mine data is faster, cheaper, and more effective than any paper-based system. According to industry analysts, “HR without technology is becoming an unthinkable proposition.”2 The use of information technology (IT) for HRM has increased at a fast pace over the last couple of decades. As a result, HR professionals have been able to handle a greater workload and achieve operational efficiency. Compared to paper-based systems, IT provides better data storage, information retrieval, and tools for analysis—capabilities that help alleviate the burden of transactional activities. This allows more time and resources to be dedicated to the more strategic roles of business partner and change agent.3 Workforce analysis capabilities and related dashboards and scorecards, for instance, help human resources managers collect and interpret data to measure the success of their efforts (a topic more thoroughly covered in Chapter 14).4

Within HR, some basic requirements are now being met with IT. Employee benefits and payroll management are typically automated in one way or another. These are basic

Some observers are skeptical that software products by them- selves will aid a company’s human resources planning efforts. But as organizations seek to expand their talent management programs to include mid-level leaders and not just top execu- tives, computerized systems with databases are crucial, says Jim Holincheck, an analyst at the research firm Gartner.

Succession-planning software typically allows com- panies to do things such as assess the risk that various leaders may leave the company, list possible replacements for managers, and document the strengths and credentials of up-and-coming employees. Besides managing succes- sion and career development plans for more employees, software products in this field have other benefits, advo- cates say. These include more-up-to-date information than paper-based plans done once a year and an improved ability to search for candidates from within a company.

Auto parts and services chain Pep Boys is convinced it made a sound investment when it began using software from SuccessFactors about a year ago, says Liviu Dedes, the firm’s director for training and organizational develop- ment. The software was part of a broader succession-man- agement overhaul, which included a set of 84 round-table discussions throughout the country on employees’ poten- tial. According to Dedes, SuccessFactors’ software helped

the company overcome problems it discovered when it reorganized its business in 2004. The chain, with some 20 000 employees and nearly 600 stores throughout the United States and in Puerto Rico, wanted to double the number of area directors to 84 in a period of two months. It was a “very painful” event, thanks to internal and external talent pools that were “shallow,” Dedes recalls. For one thing, he says, Pep Boys’ paper-based system made it hard to notice quality candidates even in the neighbouring areas. The company also had inconsistent measures of people’s potential. SuccessFactors’ software, which Pep Boys accesses over the web, has helped the company standardize its employee reviews around a set of compe- tencies and also made it much easier to see the aspirations and abilities of some 2000 managers throughout the com- pany, Dedes says. Far from being a bust, human resources planning software served as a catalyst for the company to reflect on and improve its approach to succession manage- ment, Dedes says: “It was a great opportunity to rethink ourselves and revise the process we were using.”1

Source: Adapted from Frauenheim, E. 2006. “Software Products Aim to Streamline Succession Planning,” Workforce Management Online,

SOFTWARE FOR HR PLANNING

Information technology The hardware and software, including networking and com- munication technologies involved in storing, retrieving, and transmit- ting information

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Strategic Human Resources Planning NEL200

transactional activities that have a long history of IT use. Such transactional activities can also be outsourced to an outside company. More strategic and analytic operations, however, are only just starting to benefit fully from the capabilities of automation. In the area of employee recruitment, for instance, the use of web-based job sites, portals, and kiosks to attract job applicants is increasing. In the area of performance manage- ment, several software solutions are now available to streamline the multisource (or 360°) feedback process, and the setting and monitoring of employee performance goals. Using IT to update and track employee skills inventories and succession management plans ensures that the data is accurate and available to decision makers when needed. These more strategic and analytic operations are rarely outsourced. This would explain why, as HR outsourcing continues to grow, most organizations resort to selective outsourcing.

// NEW SERVICE DELIVERY MODELS Gaining access to data in a timely manner is a constant challenge. The good news is that computer capacity is increasing at a steady pace; computers have doubled in capacity every 24 months since 1970, and there is no reason to expect a slowdown in the near future. HR is leveraging this computer capacity to improve service delivery and, by doing so, is transforming itself.5

WEB-BASED HR Web-based HR allows service delivery that pushes employees and managers into making transactions (see HR Planning Today 8.1 about how mobile apps are helping to con- nect employers and employees). Self-service is an important web-based service delivery

HR PLANNING TODAY 8.1

APPS FOR HR

Increasing usage of mobile technology has created an “apps” culture for some organizations, with industry sources predicting a doubling of usage among HR pro- fessionals. In some instances HR departments are offering apps for HR, which include obtaining and sharing legal information and benefits. While recruiting heads the list of HR mobile apps, experts predict that tracking time and attendance and payroll will dominate over the next years. Some new apps that are becoming popular include

• People search applications: This mobile app allows recruiters to mine social media to pull information from Twitter, Facebook etc. about candidates.

• Benefits administration: This app allows employees to request vacation time, track their use of benefits, and submit claims.

• Talent management: The app allows managers and employees to view current skills, job histo- ries, and succession plans as well as get data on open positions, head counts, turnover, and other HR planning metrics.

Source: Anonymous, “Growing Use of Apps Expanding Operations of HR Professionals,” HR Focus, Vol. 87, No. 11 (November 2010): pp. 4–5; B. Roberts, “Mobile Workforce Management?” HR Magazine, Vol. 56, No. 3: pp. 67–30.

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NEL 201CHAPTER 8 Information Technology for HR Planning

model. Another is web-based HR service solutions through online access to information, resulting in quicker responses from experts. Recruiting can now contain basic computer- based screening tests to reduce the applicant pool. Hence, rather than outsource, HR may consolidate its services into an internal HR service centre and operate the centre with its own HR practitioners.

ENTERPRISE PORTALS Enterprise portals are one of many IT tools that allow efficient access to relevant content and applications. HR portals are sophisticated websites that are designed to communicate a range of human resources information and a variety of organizational resources. They provide a single site for employees to access HR services. They are, in a sense, HR’s front door6 as they offer a web-based access point to all information sources, tools, and systems needed to consume HR services effectively. Employees can access the portal to share information and collaborate more effectively with customers, partners, and suppliers using a secure infrastructure. The portal might also allow employees to sign up for direct deposit or view their time cards. Employees may also gain access to a knowledge repository and e-HR functions.

SELF-SERVICE Self-service is based on the principle that data is most effectively captured at source. Self-service allows employees and managers to communicate with and affect data- bases. For example, employees might input or edit personal information such as their addresses, emergency contacts, or self-evaluations. Employees and managers might also be authorized to apply for travel reimbursement and enroll for benefits or training classes. In some organizations, employees can use self-service to view job openings within the company, create application materials, apply for a position, and check the status of pending applications. Employees might also use self-service applications to model retirement options or enroll in benefits programs. Managers may use self-service to access authorized information about the employees they supervise. They may also use self-service to complete a requisition to fill an open position. Managers might further use the system to compile employee absenteeism and turnover data, to forecast HR demand, or to manage employees from recruitment to the annual employee review and compensation planning. This is how employee self-service (ESS) and manager self-service (MSS) applications are changing service delivery models as HR service consumers no longer need to interact directly with HR service providers.

// DIFFERENT SOLUTIONS FOR DIFFERENT NEEDS IT can be leveraged to better manage several activities involved in HR planning. For instance, available information on employees’ participation in training, their competen- cies, and their performance levels may help determine the most competent employee for a position. Easy access to data may also help management identify areas where avail- able talent is lacking for adequate succession. Moreover, technology can be leveraged

Employees can edit and input data on their personnel files.

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Enterprise portals Knowledge communities that allow employees from a single or multiple companies to access and benefit from spe- cialized knowledge associated with tasks

Self-service A technology platform that enables employees and managers to access and modify their data via a web browser from a desktop or cen- tralized kiosk

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to gauge client satisfaction with the service levels provided by the HRM department, and electronic surveys are increasingly used to conduct climate or engagement surveys. As a result, IT can support the different steps of the strategic HR planning process.

There is an amazing diversity of software solutions for HRM and HR planning. Organizations may favour a comprehensive human resource information system (HRIS) or a specialty product focused on a single area, such as applicant tracking. Within these two broad categories, the marketplace offers a range from low-cost, to mid-market, to costly high-end systems. HR Planning Notebook 8.1 discusses the stages of adoption of HR technology in organizations. In this section, we review these options, and also enterprise solutions such as those offered by SAP, BambooHR, Kronos, and APS.

HRIS The human resources information system (H RIS) offers an integral solution for the HR department. It includes the software, hardware, support functions, and system policies and procedures used to gather, store, and report human resources data. The system collects, stores, maintains data, and retrieves information about employees and their jobs.

The HRIS provides access to a large database through a variety of modules that automate diverse functions. As such, the HRIS is an integrated solution that includes several subsystems or modules such as recruitment and selection, time and attendance management, payroll, training and development, pension administration, and so on. The HRIS thereby covers most of the important subsystems of HRM. It is the primary transaction processor, editor, record keeper, and functional application system that lies at the heart of most computerized HR management work.

HR PLANNING NOTEBOOK 8.1

STAGES OF HR TECHNOLOGY ADOPTION

Organizations seem to go through various stages as they decide to use technology to help manage the workforce. These are briefly described:

Stage 1: At this initial phase, companies simply codify employee data such as name, job, compensation, etc.

Stage 2: The basic data is supplemented by data pulled from other sources, such as performance rat- ings and training outcomes.

Stage 3: In this stage, employees are given access to their data and can update or edit their profiles. They

can also access career trajectories, and indicate their career preferences.

Stage 4: This is the data mining stage, where orga- nizations use statistics, such as turnover data by occupation to predict employee behaviour, and link it to organizational outcomes.

These talent management systems (and new inte- grated HRMS systems) input performance history, educa- tion, job assignments, tests taken (so these systems are extremely useful understanding what drives performance, engagement, and other desirable outcomes.

Source: Robb, D. “Sizing up Talent,” HR Magazine, 56, 4, April 2011, 77–79. Retrieved November 8, 2014, from http://www.linkedin.com/today/post/ article/20131028062534-131079-the-datafication-of-human-resources.

Human resources information system (HRIS) A comprehensive across-the-board soft- ware system for HRM that includes subsys- tems or modules

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SPECIALTY PRODUCTS Numerous specialty products are available that enable the automation of discrete tasks and responsibilities. They have the ability to address specific needs as they are focused on a single area of HRM. They thereby offer the advantage of going in-depth into a particular business activity. Some examples of specialty products include compensa- tion planning, workforce scheduling, managing training and e-learning, and applicant tracking. Examples are provided throughout this chapter.

Such specialty products may be easily acquired off-the-shelf by smaller companies as less costly solutions for addressing specific challenges. They are also likely to interface with a company’s more comprehensive HRIS or ERP base system.

ENTERPRISE SOLUTIONS Enterprise resource planning (ERP) solutions are based on software that integrates data from diverse applications into a common database. They cover the fullest range of orga- nizational activities and processes, including finance, logistics, production, accounting, and HRM. ERP computer systems are used by large corporations around the world, adopted with the aim of achieving substantial cost savings and improved access to “tried and tested” solutions, new releases, and an opportunity to update procedures and align them with the so-called “best practices.”

The ERP approach promotes the use of a single, shared relational database for critical information across the organization. This fosters the enforcement of consistent processes and procedures throughout the organization and ensures that administrative units can easily share information and communicate with one another. For HR, the enterprise-wide solution provides a platform for a better integration of HR and finance in the management of payroll.7 When HR finds it difficult to obtain budget approval for investments in an HRIS solution, the enterprise-wide solution offers an opportunity for automation along with other administrative functions. HR professionals may also gain credibility as a result of their effective involvement in an ERP implementation. The ERP approach, however, is often quite costly with a lengthy implementation, as it involves significant organizational and contextual change.8 HR may get sidelined in the process of integrating a whole range of functions across the organization. Also, because ERP systems are built with “generic users” in mind, they may not be well adapted to the specific practices and requirements of the HR user group in any given company. This may create tensions regarding the organization’s unique identity.9

// BIG DATA Big data ultimately refers to the integration of digitized data from all the corporate functions, including marketing, operations, finance, and HR. It even extends to cus- tomer information such as customer satisfaction, buying habits, and preferences, as well as information from social media sources such as Facebook, LinkedIn, and more. Big data may comprise large, unstructured and unrelated data sets that can be difficult to analyze.10 Big data is commonly measured in petabytes or larger measures, where one petabyte is the equivalent of 1,000 terabytes. And Big data is getting bigger all the time; some suggest that the world’s available data is doubling every two years.11

Specialty products Software solutions for specific specialized applications that may or may not interface with the main database

Enterprise resource planning (ERP) Commercial software systems that automate and integrate many or most of a firm’s busi- ness processes

Relational database A database that can share information across multiple tables or files, which allows the same information to exist in multiple files simultaneously

Big data The integration of digitized data from multiple sources and in multiple formats, including structured and unstructured data

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How big is Big data? Recent estimates show that Walmart collects roughly 2.5 petabytes of customer data every hour, and the expectation is that as the ability to collect different types of data, store data, and use it to develop customer insights grows, so too will the amount of data.12

TYPES OF BIG DATA Big data is based on many different forms, which can be classified into two basic categories:

1. Structured data. These are the kinds of data with which businesses are most familiar. Structured data are essentially any form of data that can be orga- nized into columns and rows. When HR practitioners enter employee data into the HRIS system, or when finance employees enter organizational financial data, they usually go into a spreadsheet or database that is orga- nized into columns and rows. Other types of structured data include sensor data (e.g., from swipe cards or from monitoring movement).

2. Unstructured data. These forms of data include the various kinds of files you might have on your computer. Text documents, email or text messages, audio, presentations, geotags, images, or videos are all unstructured data because they do not conform to a pre-established structure. Unstructured data may be searchable, but can be difficult to include with other types of data for analysis.

These two basic types of data can include data that are produced internally, or that originate outside the organization. External data can originate from suppliers, customers, or social media sources, and are becoming increasingly useful in Big data applications, as organizations try to understand how their strategy affects and is affected by customers, competitors, and their supply network.

Big data represents the integration and analysis of many different types of data from a wide variety of data sources.

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THE FIVE PILLARS OF BIG DATA When attempting to assess an organization’s readiness for Big data, the five pillars of Big data give some indication of the resources required to extract value from the investment required to collect, store, and analyze Big data. These five pillars refer to the attributes of volume, velocity, variety, veracity, and value.13 Let’s take a closer look at each of these attributes:

1. Volume. As we have already discussed, the volume of data that organizations can collect today is staggering. As people’s choices and preferences become issues of public record through social media, and as the Internet of things proliferates, making the usage of many common everyday items measur- able, the volume of data available for capture is rapidly expanding.14 Cisco estimates that the number of networked devices (including things such as televisions, thermostats, security cameras etc.) will increase from 17 billion in 2016 to 27 billion by 2021.15 The first resource requirement for organiza- tions considering trying to make use of Big data is having the capacity to store the potentially overwhelming volume of data.

2. Velocity. This refers to the requirement to be able to transfer large amounts of data in a reasonable period of time.16 It might be possible to warehouse large amounts of video data, but if they cannot be accessed and searched in a reasonable period of time, it becomes increasingly difficult to integrate those data into any kind of analysis or to combine them with other data in a meaningful manner.

3. Variety. Big data can come in many formats, as suggested by the possible types of unstructured data. Organizations must have the ability to deal with a wide variety of data types to make the most use of Big data.

4. Veracity. As the variety and volume of data increase, the old saying garbage in, garbage out becomes even more relevant. When considering the way that unstructured data might be error prone (e.g., the metadata might be incor- rect for photo files, or object recognition from video files might be error prone), and the reduced ability to verify the accuracy of external data, the potential for error in the data leading to incorrect inferences from the data becomes greater, and the ability to detect and reduce those errors becomes more difficult.

5. Value. With the ability to capture data from so many sources, how do organizations determine what data is of value and what to ignore? More valuable data can be given greater attention so that it is gathered with less error. This is one area where artificial intelligence can help to determine how data can be arranged and analyzed, and consequently what data is more useful.

The five pillars demonstrate that harnessing the power of Big data presents signifi- cant challenges and a large investment of knowledge, skills, and technological capital. Given the large increase in the uncertainty of the accuracy of unstructured and external data as well as the complexities of making associations among these disparate forms of data, the use of artificial intelligence to manage these tasks has become an important aspect of using Big data.

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ARTIFICIAL INTELLIGENCE AND MACHINE LEARNING Artificial intelligence in general refers to the ability of a piece of software to learn. This learning can take several forms that range from a reward-based method to unsupervised, predictive learning.17 Reinforcement learning, like the kind used on people and ani- mals, is also used with machines. By giving the software a clear objective, but without the system developers knowing how to achieve that objective, the machine attempts millions of self-directed simulations until it achieves an appropriate outcome.18 This is how IBM taught Deep Blue, its chess computer, to beat world champion chess masters. As artificial intelligence matures, it will become increasingly efficient at helping to sift through Big data for relevant insights. However, Big data and artificial intelligence pose problems for organizations beyond the challenges of developing the technology and providing the resources to enable it. The issues around Big data quickly move from how machines learn to how to manage the security of the data, the privacy of individuals, and the ethics around decisions made by machines.

Data security is an ever-growing concern, particularly as the volume of data stored increases. The Equifax data breach in 2017 demonstrated that individuals are not completely in control of their own data, and companies with which we have no direct contact can be the source of leaking highly personal and confidential data such as social insurance numbers, addresses, and dates of birth. Individual privacy goes beyond data security. As Big data becomes more capable of predicting consumer preferences and employee behaviours, organizations can learn, and potentially share aspects about our lives that we prefer to keep private (see HR Planning Today 8.2 about how one father learned that his daughter was pregnant). The ethics issues surrounding Big data pose many questions that will need to be answered before organizations can fully grasp the risks involved in using artificial intelligence to aid in decision making.

ETHICS AND BIG DATA A strength of artificial intelligence (AI) is that we can teach it how to make decisions using historical examples, and then let it use that guided learning as a launch point for experimenting with new ways of applying what it has been taught. This is particularly useful for helping humans to make sense of large sets of data that have many pos- sible combinations of variables that are coded in multiple formats. However, artificial intelligence lacks transparency around the decision rules that it develops. It cannot explain the decisions that it arrives at, which is the point at which ethical issues around the use of AI begin to surface. Who becomes liable for the decisions and predictions that are made using AI?19 Can we hold the company that developed the software responsible? What happens when decisions are made using data that have errors, and that lead to costly mistakes? For HRIS vendors, the software either works as expected or has a flaw that the vendor is responsible for correcting. But when AI makes a costly decision or analysis, what are the conditions under which this can be called a bug? And what happens if the software stops working? Imagine that the department

Artificial intelligence A software-based ability to demonstrate learning and decision making

Big data and artificial intelligence present new questions for HR professionals around data security, individual privacy issues, and ethics.

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NEL 207CHAPTER 8 Information Technology for HR Planning

of HR analysts has been replaced by software that suddenly fails. What operational risk does the organization face in such a circumstance? Questions like these help to demonstrate the kinds of risks and issues that organizations face when considering implementing Big data and AI. HR Planning Today 8.3 further explores the potential limitations of Big data to transform the HR function in the near future. Until many of these questions can be answered, the primary tools used by the HR function will be the HRIS system and its associated databases, spreadsheets such as Excel, and sta- tistical analysis packages. These tools may be used in isolation or combined to form a workforce metrics dashboard.

// HR METRICS AND WORKFORCE ANALYTICS HR metrics and workforce analytics applications address the challenge of getting business intelligence for strategic decision making. As a subset of business intelligence, HR metrics use statistical modelling and software to gather information about employees and work in order to optimize the use of human resources in the organization. The best applications provide on-demand access to workforce performance through dashboards

HR PLANNING TODAY 8.2

BIG DATA AND HR SEGMENTATION

Have you ever shopped on a website like Amazon and noticed that the site makes several suggestions for similar or complementary products to the one you are initially interested in purchasing? Organizations are constantly trying to develop a better understanding of their customers’ desires and purchasing behaviours and, thanks to Big data, they are finally getting somewhere. Target made big news in 2012 when it mailed coupons for products that would be of interest to pregnant and new mothers to a teenage girl. The girl’s father was outraged by the targeted mailer until he learned that his daughter actually was pregnant.

How did Target know she was pregnant before her father did? Target collected data about customers based on their past purchases using their credit card, email address, or other form of unique identifier. Target set a specific business challenge of trying to appeal to pregnant women who were relatively early on in their pregnancy. Target believed that their strategy of providing a single stop for all shopping needs was particularly

appealing to new parents, and that if they could make women aware of Target’s value proposition early in preg- nancy, it might help to solidify new shopping habits. Target’s research revealed that pregnant women tended to buy a set of 25 particular items, and so when shop- pers bought several items from among these 25, Target would send them coupons that would be of interest to pregnant women.

The case that made Target news is just a single example of the kinds of efforts that firms are making to segment customers by their preferences and then try to determine how to predict the interests and needs of those specific segments. HR can use Big data in similar ways; for example, HR can segment its employees by their preferences, and learn how to predict turnover for each of these employee groups. Or HR could use Big data to develop a better understanding of how employees should be combined from these groups in order to predict higher team performance.

Adapted from Kashmir Hill, 2012, “How Target Figured Out a Teen Girl Was Pregnant Before Her Father Did,” Forbes, https://www.forbes.com/sites/ kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/#1802e0966668, retrieved March 16, 2018; C. Duhig, February 16, 2012, “How Companies Learn Your Secrets,” New York Times Magazine, http://www.nytimes.com/2012/02/19/magazine/shopping-habits. html?pagewanted=1&_r=1 , retrieved March 16, 2018.

Business intelligence The applications and technologies for gath- ering, storing, analyzing, and providing access to data to help users make better business decisions

HR metrics Summary measures of HR outcomes that are relevant to the performance of the HR function. Example met- rics include the cost of recruitment, time- to-hire, and turnover rate

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HR PLANNING TODAY 8.3

THE LIMITATIONS OF BIG DATA ON HRM

Google began a Big data HR project in 2008 called Project Oxygen. This project sought to discover the attributes of a good manager at Google by looking at past perfor- mance reviews, surveys, nominations for best manager awards, and other sources of data that could be used to uncover the habits, behaviours, or attributes of a great manager. After years of study, Google determined eight habits of great managers, but the results almost seemed anti-climactic. Each of the eight habits was uncovered some time ago, and so the results of the study appeared more confirmatory and sensible than ground breaking. Some researchers suggest that Big data and AI have the potential to have a large impact on aspects of the

business that deal with less sensitive and private data and where there are millions of data points, such as mil- lions of customer transactions or inventory transactions. But the scope for Big data and AI to have a large impact on the business through HR is limited by the degree to which private employee data can be used and shared, and by the fact that even very large organizations count their employees in the tens of thousands rather than mil- lions. Big data will certainly lead to new ways in which HR connects with other functional areas of the business to solve organizational challenges. What is uncertain is the extent to which Big data and AI will transform the HR function.

Adapted from: Bryant, A. (March 12, 2011), Google’s Quest to Build a Better Boss. New York Times, http://www.nytimes.com/2011/03/13/ business/13hire.html?smid=pl-share, retrieved March 6, 2018; Cappelli, P. (June 2, 2017), “There’s No Such Thing as Big Data in HR,” HBR.org

that place information such as turnover rate, comparisons of pay rates between groups, and other summary information at the manager’s fingertips. The purpose of HR dash- boards is to organize key pieces of HR information and present data in ways that are simple to understand.

The role of workforce analytics can be placed into one or more of three categories: descriptive analytics, which describe what happened; predictive analytics, which make inferences based on existing data to describe what could happen; and prescriptive ana- lytics, which describe what should happen.20 While workforce analytics span all three of these domains, HR metrics function largely within the first domain of descriptive analytics.

Workforce analytics is still in its infancy. To date, there are very few studies on HR analytics, and it is estimated that roughly 15 percent of firms are using HR analytics (see HR Planning Notebook 8.2 for more discussion on the current state of HR analytics in organizations).21 While this low number may seem surprising given today’s focus on measuring the impact of HR practices, the reason for this surprise may be attribut- able to the ambiguity in what workforce analytics actually is, and how it differs from HR metrics. The primary distinction between these two aspects of measurement is that HR metrics generally refer to a narrower set of measures that tend to be restricted to measuring HR outcomes such as the cost of recruitment from various sources, the time taken for selection, or turnover rates by department, whereas HR analytics attempt to place HR in the broader context of the organization and its other functions, systems, or strategy (see HR Planning Today 8.4 for an example of the use of HR analytics to connect HR policies with organization strategy).22 HR analytics has been defined as an “HR practice enabled by information technology that uses descriptive, visual, and statistical analyses of data related to HR processes, human capital, organizational per- formance, and external economic benchmarks to establish business impact and enable

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HR PLANNING NOTEBOOK 8.2

WORKFORCE ANALYTICS

Some uses of workforce analytics include • predicting the probable success of a candidate;

• identifying and quantifying the physical risks to employees;

• identifying workforce characteristics that contribute to fraud;

• measuring employee engagement and predicting turnover;

• identifying obsolete departments and or positions.

Despite the power of data to inform decisions, only about 10 to 15 percent of companies use workforce ana- lytics, although two-thirds indicated that they intended to do so in the next two years. This “datafication” of HR is a major business trend.

Sources: Margaret Rouse, “Workforce Analytics,” http://searchfinancialapplications.techtarget.com/definition/workforce-analytics, retrieved November 4, 2014; Visier, “How Is Talent Driving Business Success?” http://www.visier.com/lp/harvard-business-review-hr-joins-the-analytics- revolution, retrieved March 6, 2018; Giller, J. “HR Analytics,” HRPATODAY, September 2014, pp. 31–32.

HR PLANNING TODAY 8.4

HR ANALYTICS AND STRATEGY AT LOWES

In 2007, Lowes began a project to understand how HR initiatives were impacting bottom-line performance. The project was initiated by the frustration over the fact that human capital, the single largest operating expense, was also one of the least measured. Lowes partnered with a third-party organization to help with the development and analysis of the project. The scope of the project included human capital metrics, operating metrics, marketing infor- mation, customer data, and financial performance data so that Lowes could find connections not only within the HR function, but also how each of these areas of the business combine to affect broad business problems.

The project team included experts from the HR depart- ment, the operations department, and statistical analysts from the third-party organization. When projects involve connections between human capital and other aspects of the firm, it is very important to include HR experts at a high level in the project. The process of developing a model that predicts how human capital influences business processes requires experts with knowledge of theory relating to psy- chology and sociology, and how these theories are relevant to and used in the study of organizational behaviour, and

so it is very important to include HR experts in the model development and interpretation processes. At Lowes the project unfolded in the following manner:

1. Establishing senior management buy-in. Projects that attempt to connect human capital with other business functions and processes require cross-functional sup- port. They also involve making particular assumptions; for example, what bottom-line performance metrics are of particular interest to the firm? What aspects of customer behaviour are important to strategy? Or, how does the organization define strategic activity? The success of HR analytics depends on buy-in and cooperation from across the firm as well as agree- ment around the assumptions made about what activities, behaviours, and measures are important to the firm.

2. The discovery process. This stage involves two related process: theorizing what the model should look like, and understanding what data is available for use in the project. In the case of Lowes, the business challenge was trying to develop a model to connect

(Continued )

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human capital to bottom-line performance in the firm. Once the model has been developed, project planners must ensure that the data is available, and that the data has been audited for errors. If data collection is necessary, then this must be undertaken before pro- ceeding with the project. For example, if the project team theorizes that employee perceptions of a climate for customer service is an important driver of profits, but no measure of customer service climate has been surveyed, then the team must develop this survey and capture employee perceptions of service climate.

3. Gaining executive buy-in of the model and the vari- ables. HR analytics involve assumptions. For example, employee perceptions of a customer service climate might lead employees in a work team to demonstrate more helping behaviours toward customers. In order for this to be a strategic benefit for the firm, execu- tives must agree that these helping behaviours are in line with the firm’s value proposition. If the firm strategy is to process customers as quickly as pos- sible, then helping behaviours might actually run contrary to what executives consider to be strategic behaviours. Thus, the assumptions made around the model must be in line with what senior management believes to be consistent with the firm’s strategy.

4. Communicate results and take action. Once the results of the analysis are available, management must have a communication plan in place to interpret the results for all functions in the organization. HR analytics generally connect with multiple functions

within the organization, and consequently can have impact well beyond the HR function. How the results impact each function differently is a critical aspect of the interpretation and communication of the results. Management must also have a plan to communicate what action will be taken as a result of the analytics project.

5. Use the results to theorize and improve the model. As discussed in Chapter 5, action planning involves constantly moving from analysis to theory. As results from one analysis become available, it is important to learn from the process, improve the model, and move into analysis again. This implies constant change and learning, as we discuss in Chapter 9.

As a result of their HR analytics initiative, Lowes learned that engaged employees increase store-level performance by increasing average sales per customer. Engaged employees help customers with their purchases and provide suggestions for completing projects, thereby increasing the average customer basket size per visit. Stores with overall higher employee engagement had significantly higher yearly sales. While prior research has demonstrated that employee engagement relates to firm performance, Lowes was able to model the process through which engagement relates to performance in their stores. This knowledge can be used to implement HR ini- tiatives aimed at motivating all employees to perform the kinds of behaviours that are strategically relevant to store performance, and to hire job applicants who are more likely to demonstrate the behaviours of engaged employees.

Adapted from C. Coco, F. Jamison, and H. Black, 2011. “Connecting People Investments and Business Outcomes at Lowe’s: Using Value Linkage Analytics to Link Employee Engagement to Business Performance,” People and Strategy, 34(2), 28–33.

data-driven decision-making.”23 This definition is more in line with the objectives of Big data and AI, and so it is not surprising that while many organizations are using HR metrics, few are at the point of using HR analytics.

MAXIMIZING THE BENEFITS OF HR METRICS

DASHBOARDS

An HR dashboard is simply an aggregation, in electronic format, of useful or relevant HR metrics or performance indicators. The convenience of a dashboard is that it should be able to incorporate data from multiple information sources, and that it provides

HR dashboard An aggregation of useful or relevant HR metrics or performance indicators that provide a summary snapshot of performance

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NEL 211CHAPTER 8 Information Technology for HR Planning

real-time summaries of performance. Popular measures for inclusion in dashboards are ratios of the most recent performance period that captures turnover rate, employee survey results, time to hire, cost per hire, and hiring rates based on recruitment source. The kinds of key performance indicators (KPIs) that appear on dashboards include indicators of operationally important or strategic activities such as product delivery times, sales targets, or sales growth.24

The purpose of dashboards is to provide managers with a quick understanding of key performance indicators in their business. Rather than looking through multiple spread- sheets and conducting hourly, daily, or weekly analyses of the updated data, dashboards focus managers’ attention on the most recent and up-to-date information. A criticism of dashboards is that they can focus too much attention on summary measures, and so, rather than contributing to higher performance, they can distract managers from the real underlying causes of the measures. Dashboards can also serve very specific uses. For example, organizations can track the amount of communication between team or group members to map the flow of communication and transfer of information across groups.25 As these types of communications data flow on practically a constant basis, a dashboard visualization of the flow of information can suggest what group members are more engaged with the team, and uncover informal group hierarchies and processes.

KEY PERFORMANCE INDICATORS

The purpose of an HR dashboard is to acquire a snapshot of system performance at a given point in time. In order to capture this snapshot, management must give some thought as to what aspects of performance are the most suitable to monitor. These performance measures are known as key performance indicators (KPIs). The KPIs can be used at the individual level to monitor the alignment of individual performance with functional and organizational objectives, as you will see in an HR scorecard in Chapter 14, or at the functional level where the purpose is to gauge the alignment of the overall functional area with the firm’s strategy. The KPIs that are best to include in an HR dashboard are those that demonstrate the extent to which the HR function is addressing strategic needs, and are improving service quality and efficiency.

Sysco is one of the largest food services companies in North America, providing food products to health care, restaurant, and educational facilities as well as the hos- pitality industry.26 Using HR metrics, Sysco learned that survey measures of truck driver quality-of-life scores and consequently organizational turnover were affected by a transition to a new compensation plan that provided pay incentives to drivers who made more deliveries with better safety records and lower error rates. These measures also predicted customer satisfaction, thereby increasing organizational performance. Three KPIs that could monitor this system leading to performance include truck driver climate survey measures, customer satisfaction, and driver turnover rates. Changes to either organizational climate scores or driver turnover rates could signal a coming change in customer satisfaction, and pre-emptive HR actions could be put in place to prevent the erosion to customer satisfaction from this source. Thus, a few carefully selected KPIs can represent much more than simply the performance of the variables that they measure; they can summarize an entire system or process. That is, a few well selected KPIs represent the performance of a range of important variables or relationships that are not directly measured, and changes to the KPIs indicate when changes to other unmeasured aspects of performance are in order.27

Key performance indicators (KPIs) A snapshot measure of system performance that demonstrates the success of strategy implementation in terms of cost, quality, or time

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Strategic Human Resources Planning NEL212

To summarize, HR dashboards are visual aggregations of summary snapshots of the performance of the HR function, based on HR metrics. The metrics to be included in a dashboard should provide information about processes that relate to strategically relevant activities and outcomes of those activities. By doing so, the HR dashboard provides a real-time glimpse of the extent to which the HR function is successful in contributing to organizational performance.

// OTHER ASPECTS OF IT FOR HR PLANNING WORKFORCE MANAGEMENT AND SCHEDULING The logistics of workforce management and scheduling are often quite complex. Workforce scheduling and optimization software provides applications for deploying employees most effectively. In a call centre, for example, the planning process might involve accurately forecasting call volumes, handle times, and overhead to determine staffing and scheduling requirements. Once these forecasts are available, the software application could quickly create schedules that take into account work rules, call volumes, agent preferences, and training/meeting times. Then managers could make scheduling adjustments as call volumes and other variables change.

Trade shows are an effective way to learn about new HR technologies.

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NEL 213CHAPTER 8 Information Technology for HR Planning

FORENSIC REPORTING Forensic reporting can be used to monitor employees, for the good of the organization and for the benefit of employees. HR departments normally have the responsibility for compliance with policies. Software can audit employees to ensure they comply with policies such as safety inspections or overtime payments. Forensics can also identify at-risk employees. For example, Canadians report experiencing high levels of stress, and the first signs of burnout may be higher levels of absenteeism, turnover, or accidents. Grouped together, these factors might offer an early signal of decreases in productivity. If the stress continues, the organization may face higher workers’ compensation rates, higher recruitment and selection costs, and increases in the demand for overtime. The need to schedule the remaining workforce will become increasingly important.28

ENSURING DATA SECURITY Employers have an obligation to protect employees’ personal records, medical records, and employment tests. Legislation in Canada requires that personal information used for an administrative purpose be as accurate, up to date, and complete as possible. With regard to the collection of personal information, only that information which relates directly to a business should be collected and maintained in the HRIS. There must be a proper balance between what an individual is expected to divulge and what infor- mation employment and management decisions require. This legislation also sets boundaries for the use of personal information. Such information should be used only for the purpose for which it was obtained or compiled, or for a use consistent with that purpose.

Another golden rule is that only authorized persons should have access to employee data. Some security features that restrict access include login security, row- level security (record security), and field-level security (data field).29 Procedures to further protect data include the usage of PINs and passwords; the usage of encryp- tion devices or software when sending sensitive email; smart cards or tokens; provision of regular, ongoing education and reinforcement of clearly defined orga- nizational policies; and turning off systems when they are not in use.

System security further protects sensitive data. Secure operating systems and dependable computer programs are, of course, important. Another key to security is lim- iting access to computer resources. Company policies, for instance, can physically limit access to computers to only those who will not compromise security. This might involve restricting entrance to a property, a building, or a room. Organizations need systems to protect corporate data.

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// EVALUATING HR TECHNOLOGY User satisfaction and system usage are important indicators of HRIS success.30 Drawing from the technology acceptance and user satisfaction streams of research, a study found that attitudes toward IT are influenced by behavioural beliefs about technology useful- ness and ease of use.31 These beliefs, in turn, are influenced by information satisfaction and system satisfaction, which result from information quality and system quality. An audit that includes the different measures laid out in HR Planning Notebook 8.3 may provide useful insights into HR technology effectiveness.

CONDUCT A NEEDS ANALYSIS Needs regarding HR technology are constantly evolving. Nevertheless, writes James G. Meade, “You are best off if you define those needs, at least in outline form, and plan for software that will meet the needs as they evolve.”32 A systematic needs analysis will involve collecting information about the organization (e.g., size, industry demands), its technical environment (e.g., hardware, operating systems, network environment, data- base, installed software, telecommunications, possible application service providers), and the needs of its HR department. With regard to such needs, Meade suggests exploring areas in which the HR department is not accessing critical information in an accurate

Technology acceptance Extent to which users intend or actually use technology as a regular part of their job

HR PLANNING NOTEBOOK 8.3

SAMPLE TECHNOLOGY EFFECTIVENESS ITEMS

• Attitude: – Using this HR technology is very enjoyable.

• Usefulness: – Using this HR technology enhances my

effectiveness on the job. • Information satisfaction:

– I am very satisfied with the information I receive from this HR technology.

• System satisfaction: – Overall, my interaction with this HR technology

is very satisfying. • Information quality:

– This HR technology produces comprehensive information (completeness).

– The information provided by this HR technology is well laid out (format).

– There are few errors in the information I obtain from this HR technology (accuracy).

– The information provided by this HR technology is always up to date (currency).

• System quality: – This HR technology operates reliably

(reliability). – This HR technology makes information very

accessible (accessibility). – This HR technology can be adapted to meet a

variety of needs (flexibility). – This HR technology effectively integrates

data from different areas of the company (integration).

– This HR technology provides information in a timely fashion (timeliness).

Source: Robb, D. “Sizing up talent,” HR Magazine, 56, 4, April 2011, pp. 77–79; http://www.linkedin.com/today/post/article/20131028062534- 131079-the-datafication-of-human-resources. Retrieved November 8, 2014.

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or timely manner. For instance, if benefits enrollment takes almost two months, this wait time might be considered a problem. Some of the questions that may help identify such gaps are presented in HR Planning Notebook 8.4.

It is also helpful to consider what information requests the HR department responds to, what reports and documents it uses, what information passes through the HR unit, and what manual records are maintained—in short, the information processing needs of the HR function. When needs are clearly determined, it is possible to then measure whether those needs have been addressed by the technology.

HR PLANNING NOTEBOOK 8.4

NEEDS ANALYSIS QUESTIONS

• Is the human resources department spending too much time on manual processing?

• Are there too many data security risks involved with manual processing?

• Is the current human resources management system obsolete?

• Are we able to ensure an adequate follow-up of health and safety incidents?

• Are we being responsive to current business priorities?

• Will we be able to keep up with company growth? • Are we managing our human capital as a strategic

asset? • Are we maintaining too much redundant information? • Which requests for information is the human

resources department unable to respond to? • Would it be more efficient to integrate our different

legacy systems into a single database?

// SUMMARY This chapter presented an overview of HR technology and its potential impact on the HR function. IT is becoming increasingly integrated across the HR function, the entire organization, and even beyond the organization. As data from different sources and in different formats become more available and accessible, the methods for dealing with the increasing complexity are becoming more reliant on computers and artificial intelligence. In addition to the implications for Big data and artificial intelligence in the development of better HR metrics and HR analytics, the HR function will have to develop policies around issues such as privacy, security, and ethics.

KEY TERMS artificial intelligence p. 206 Big data p. 203 business intelligence p. 207 enterprise portals p. 201 enterprise resource planning (ERP) p. 203

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216 NELStrategic Human Resources Planning

HR dashboard p. 210 HR metrics p. 207 human resources information system (HRIS) p. 202 information technology p. 199 key performance indicators (KPIs) p. 211 relational database p. 203 self-service p. 201 specialty products p. 203 technology acceptance p. 214

DISCUSSION QUESTIONS 1. In Canada, air traffic control is managed by NAV Canada, which has an international

reputation for the management of air traffic controllers. If you were a manager, what data would you find useful to schedule the shifts for air traffic controllers?

2. Databases used for HR management and planning contain a wide variety of per- sonal and sensitive data that require the organization to set security, privacy, and usage policies. What legislative and ethical requirements of data security need to be considered?

3. Big data include structured and unstructured types of data. Unstructured data can include information from photo or video files, email etc. Structured data can be anything that can be easily coded to include in a database or spreadsheet, including temperature measures and movement counters. List some of the data that companies might have captured about you as a customer or an employee over the past few days.

EXERCISES 1. You are the head of HR at major clothing retailer. At the latest strategy meeting,

the head of marketing has proposed that company profits can be increased by 75 percent if customers can be convinced to purchase more than one item at a time when visiting stores. The marketing department is proposing to study how advertising and store layout can be used to increase customer purchases. How can HR contribute to this study, and what types of employee measures would be useful to incorporate in the study?

2. You have been asked to create a list of HR metrics for use in an HR dashboard. Describe the process you would use to determine what measures to include. You do not need to list the measures; just describe the steps you would take in order to determine what metrics to include.

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CASE STUDY SUSTAINING TALENT WITH STRATEGIC WORKFORCE PLANNING SOFTWARE AT THE ENERGY RESOURCES CONSERVATION BOARD

At the Energy Resources Conservation Board (ERCB), an independent and quasi- judicial agency of the Government of Alberta, a key challenge for this not-for-profit organization includes recruiting and retaining talent.

The ERCB regulates approximately 1500 oil and gas companies and manages a budget of approximately $175 million. Given the demographic profile of the ERCB’s approximately 1000 employees, the ERCB expects the departure of 300 employees due to retirements alone in the next five years. In addition, the ERCB has an estimated average loss of 80 people per year for other reasons. To address the looming labour shortage, the ERCB undertook a strategic workforce planning (SWP) initiative. According to Susan Cassidy, Manager of Human Resources at ERCB, “SWP is about determining actions we need to take today to provide the workforce we need for tomorrow. It is taking the steps today to ensure we have the right people, in the right job, with the right skills, at the right time.”

Part of ensuring the ERCB can meet workforce requirements of the future includes going through a process of SWP and analyzing how technology can assist in that process in a strategic way, a challenge often faced by HR departments.33 As Cassidy indicates, “Data collection is an essential component of workforce plan- ning. Collecting data and turning it into management information that can be acted upon is the essence of SWP.” Acquiring the appropriate software was a necessary step to achieve this level of data collection. The ERCB solicited request for pro- posals from potential outside providers and settled on Aruspex, a niche provider of SWP. Costing about $85 000 annually, Aruspex software works to collect relevant data, creating scenarios and generating reports to help address development plans and sustainability strategies. Essentially, Aruspex “provides more than anecdotal evidence—it provides good information that is creditable.”

The adoption of strategic workforce planning suggests a shift from “manpower planning,” which includes headcounts and forecasting used for budgetary purposes, to strategic planning, which looks at replacement and succession from a holistic perspective—using technology as a leveraging tool. As Cassidy indicates, “Technology has gone beyond Excel spreadsheets which were associated with ‘manpower plan- ning’ and we realized more was needed.”

Source: Correspondence with Susan Cassidy, Manager, Resources, at Energy Resource Conservation Board and Former Chair of the Board of the Human Resources Calgary, June 2011.

QUESTION 1. Strategic workforce planning is one example of how the HR function

might be improved by information technology. In this case we see that software assists with the ERCB being able to meet the needs of the future. How might IT be leveraged in other areas of HR for the ERCB and perhaps other organizations?

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218 NELStrategic Human Resources Planning

// REFERENCES 1. Adapted from Frauenheim, E. 2006. “Software Products Aim to Streamline

Succession Planning,” Workforce Management Online, www.workforce.com, January 2006, MediaTec. All rights reserved. Used by permission and pro- tected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without the express written permission is prohibited.

2. HRfocus. 2007. “HRIT ‘Report Card’: Trends for 2008 Plans.” HRfocus, December, Vol. 84, No. 12: 1, 11–15.

3. Ulrich, D., and W. Brockbank. 2005. The HR Value Proposition. Boston, MA: Harvard Business School Press.

4. Frauenheim, E. 2007. “Keeping Score with Analytics Software.” Workforce Management, Vol. 86, No. 10: 6–7.

5. Gueutal, H.G., and C.M. Falbe. 2005. “eHR: Trends in Delivery Methods.” In H.G. Gueutal and D.L. Stone, eds., The Brave New World of eHR: Human Resources Management in the Digital Age, pp. 190–225. San Francisco: Jossey-Bass.

6. Gueutal and Falbe. 2005. pp. 190–225. 7. Newman, M., and C. Westrup. 2005. “Making ERPs Work: Accountants and

the Introduction of ERP Systems.” European Journal of Information Systems, Vol. 14: 258–272.

8. Mabert, V.A., A. Soni, and M.A. Venkataraman. 2001. “Enterprise Resource Planning: Common Myths versus Evolving Reality.” Business Horizons, May/ June: 71–78.

9. Pollock, N., and J. Cornford. 2004. “ERP Systems and the University as a ‘Unique’ Organization.” Information Technology & People, Vol. 17, No. 1: 31–52.

10. Shah, N., Z. Irani, and A. Sharif. 2017. “Big Data in an HR Context: Exploring Organizational Change Readiness, Employee Attitudes and Behaviors.” Journal of Business Research, 70: 366–378.

11. EMC Digital Universe Study: With Research and Analysis by IDC. http://www. emc.com/leadership/digital-universe/index.htm. Retrieved March 7, 2018.

12. Erevelles, S., N. Fukawa, and L. Swayne. 2016. “Big Data Consumer Analytics and Transformation of Marketing. Journal of Business Research, 69: 897–904.

13. Ibid. 14. Ibid. 15. https://www.cisco.com/c/dam/m/en_us/solutions/service-provider/vni-

forecast-highlights/pdf/Global_Device_Growth_Traffic_Profiles.pdf. Retrieved March 6, 2018).

16. Malik, P. 2013. “Governing Big Data: Principles and practices.” IBM Journal of Research and Development, 57, 1–13.

17. Anthes, G. 2017. “Artificial Intelligence Poised to Ride a New Wave.” Communications of the ACM, Vol. 60, No. 7: 19–21.

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18. Ibid. 19. Sumser, J. 2017. “Artificial Intelligence: Ethics, Liability, Ownership, and

HR.” Workforce Solutions Review, July–September. 20. Lipkin, J. 2015. “Sieving Through the Data to Find the Person: HR’s Impera-

tive for Balancing Big Data with People Centricity.” Cornell HR Review: 1–5. 21. Marler, J., and J. Boudreau. 2016. “An Evidence-based Review of HR Ana-

lytics.” International Journal of Human Resource Management, Vol. 28, No. 1: 3–26. 22. Ibid. 23. Ibid. 24. Dutta, D., and L. Bose. 2015. “Managing a Big Data Project: The Case of

Ramco Cements Limited.” International Journal of Production Economics, Vol. 165: 293–306.

25. Pentland, A. 2012. “The New Science of Building Great Teams.” Harvard Business Review: 62–70.

26. http://www.sysco.com 27. Stricker, N., F. Echsler Minguillon, and G. Lanza. 2017. “Selecting

Key Performance Indicators for Production with a Linear Programming Approach.” International Journal of Production Research, Vol. 55, No. 19: 5537–5549.

28. Matwichuk, D. 2011. “HRIS an Early Warning System for Employee Burnout.” Canadian HR Reporter, Vol. 24, No. 8 (April 25): 23.

29. Ashbaugh, S., and R. Miranda. 2002. “Technology for Human Resources Management: Seven Questions and Answers.” Public Personnel Management, Vol. 31, No. 1: 7–20.

30. Haines, V.Y., III, and A. Petit. 1997. “Conditions for Successful Human Resource Information Systems.” Human Resource Management Journal, Vol. 36, No. 2: 261–275.

31. Wixom, B.H., and P.A. Todd. 2005. “A Theoretical Integration of User Satisfaction and Technology Acceptance.” Information Systems Research, Vol. 16, No. 1: 85–102.

32. Meade. 2003. p. 84. 33. Lawler, E., and J. Boudreau. 2009. “What Makes HR a Strategic Partner?”

People and Strategy, Vol. 32, No. 1: 14–22.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• nderstand the importance of organizational change. • iscuss the role of change as part of organizational planning. • iscuss the steps of a generic change project. • efine and discuss the process of planned change. • nderstand how emergent change occurs. • nderstand the principles of a learning organization. • iscuss how the principles of a learning organization are important to oth

planned and emergent change.

CHANGE MANAGEMENT

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NEL 221CHAPTER 9 Change Management

// WHY IS ORGANIZATIONAL CHANGE IMPORTANT? rganizational change lies at the heart of the planning process. rganizations are

dynamic entities constantly growing or contracting and responding to internal and external changes some of which are within the control of the firm and others eyond its control. The planning process anticipates organizational resource requirements in response to organizational change using a variety of methods to forecast demand and

Change often affects the entire organization, and almost always extends beyond the HR function. Because it affects so many jobs and functions within the firm, it must include participation from all employees who are influenced by the change process. This means that change must be embedded deeply within the organization; if it is left to a single department or individual to ensure that change occurs, it is bound to fail. This raises a question around the role of HR and HR professionals in being agents of change. Both the Human Resources Professionals Associa- tion (HRPA) in Canada and the Society for Human Resource Management (SHRM) in the United States identify change management as a requisite competency for the practice of HR, but what does HR do to initiate and perpetuate change?

Understanding the role of the HR function or the HR professional in bringing about change can be dif- ficult. As we will see throughout this chapter, successful change requires an organizational culture that is open to constant learning, empowering employees to question processes, and to experiment with new ways of thinking about how things get done. Some researchers suspect that because the HR function is often viewed as a gate- keeping function and a bureaucracy, it is infrequently a leader in promoting change. Another impediment to acting as an agent for change is the fact that the HR function often plays a supporting role in the organiza- tion. HR advises the business line, but rarely leads it. This makes it difficult for the HR function to guide the organization through change.

In order to lead change, researchers suggest that HR professionals should possess a specific set of competen- cies, including the following:

• Strategic positioner—to be able to identify the activities, outcomes, and human capital neces- sary for a business to succeed in its market.

• Credible activist—to be a trustworthy partner to the business in helping to understand how to solve business challenges.

• Paradox navigator—to be able to understand and work from different points of view, and different mental models. For example, to be able to bring together a top-down view of competencies with a bottom-up view of KSAOs from job analysis.

• Communicator—to be able to create an envi- ronment in which employees feel that they can speak up about what is working and what needs to be improved, and believe that they can have an impact on the organization.

• Systems thinker— to be able to understand all aspects of the business, including what customers value about the firm’s products or services. This will enable the HR func- tion to understand the interactions between all aspects of the firm so that as one aspect changes, it is possible to envision how it will affect the system as a whole.

Adapted from: Power, B. (November 16, 2011). “Why Doesn’t HR Lead Change?” Harvard Business Review Digital Article; Ulrich, D., M.

Kryscynski, and M. Ulrich. (2017). “Competencies for HR Professionals Who Deliver Outcomes,” Employment Relations Today, 44(2), 37–44; Anderson, C. (April 2, 2015). “There’s a Good Reason Why HR Should

Lead Change Initiatives.” Talent Management and HR, tlnt.com

CAN HR LEAD CHANGE?

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supply and y connecting resource requirements with strategic and operating impera- tives. n order to effectively plan for and anticipate resource requirements organiza- tional planners must have a strong understanding of organizational change. hapter introduced the roots of organizational planning and change in firm strategy. n that chapter we learned that strategy is a plan for esta lishing and maintaining a competitive advantage in the market and that the firm s strategy provides the ideological context within which organizational change takes place. ater chapters cover specific change ini- tiatives such as downsizing and restructuring outsourcing and mergers and acquisitions. n this chapter we span the gap etween change at the level of conceptualizing strategy and change at the level of specific initiatives y examining the change process itself.

THE INCREASING PACE OF CHANGE nnovations like the orld ide e connect people and ideas across the oundaries of time and space to ena le change in ways that we are only eginning to grasp. rowd- funding open-source software development colla orative knowledge repositories such as wikis and shared folders mass customization the shared economy and other communi- cation-ena led advancements are changing the way usinesses operate and now connect innovators with each other their competitors and customers to ring a out dramatically faster product developments. These changes are occurring amid unprecedented levels of economic political and environmental uncertainty. n response to these levels of change and uncertainty organizations are moving toward systems that ena le faster response and adaptation to change. Flatter organizational structures more fluid jo roles greater employee autonomy and team- ased learning and decision making are all efforts that can facilitate organizational knowledge acquisition and action ased on that learning.

iven the quickening pace of change and higher levels of uncertainty in today s usiness environment firms that are a le to manage change effectively are in a posi-

tion to outperform their slower less change-capa le competitors. The a ility to manage change is such an important organizational competency that some scholars elieve that it is the only form of sustaina le competitive advantage. here other forms of competi- tive advantage are suscepti le to erosion through imitation competition or changing consumer needs firms that are a le to adapt to their environment faster maintain the a ility to stay ahead of their competition. ccordingly the most important aspects of the jo of a general manager include creating and directing strategy and managing change.2

// SOCIETAL, INDUSTRIAL, AND ORGANIZATIONAL LEVELS OF CHANGE

rganizational change occurs in response to societal industrial and firm-level develop- ments. t the societal level economic and environmental issues can e strong drivers of change. For example after the recession ig- ox stores such as est uy almart Target and ome epot found that revenues were dropping in their large-format stores. Several of the ig- ox stores have even egun to close their large stores while others have found that the ig- ox format is either restricting growth y not allowing the format to serve smaller communities or that the num er of useful locations for these large shopping outlets is ecoming saturated. Furthermore as people turn increasingly to online shop- ping the ig- ox format is ecoming less relevant to shoppers. ig- ox retailers are now developing smaller versions of their stores in an attempt to adapt to these societal changes.

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NEL 223CHAPTER 9 Change Management

t the industrial level change typically follows an S-curve pattern in which sales of a new product or service egin slowly as demand uilds followed y rapid growth as the market for the product or service ecomes mature which leads to a tapering as consumer demands develop and change. The market for ta let computing devices showed a slow start as the computer industry struggled to put together all the attri utes of size weight ergonomics and technological capa ilities that make a successful ta let device. pple found a winning design in i ad and the market took off leading to suc- cessful designs from competitors as well. s sales of the original i ad egan to peak and competition increased from other firms and devices such as smartphones with larger screens pple rought out a smaller version at a different price point and with slightly different features and also egan actively pursuing new markets for the ta let through partnerships like its alliance with M to ring i ad to the corporate market.

Firm-level developments occur largely as a result of demands from stakeholders. Shareholders a particularly powerful group of stakeholders might demand higher return on equity new leadership might prefer a different strategic direction or internal resource constraints might lead to strategic change. arge firms like with multiple usiness units in different industries might develop interesting opportunities in multiple indus- tries ut resource constraints such as managerial capa ilities or financial resources might lead to difficult decisions resulting in changes to the decisions around the projects that are approved and the projects that are downsized or shelved. Thus decision making ased on internal firm-level choices can e a strong source of organizational change.

iven the multiple levels from which the need for organizational change can arrive it is no surprise that firms experience an ongoing state of change. owever organizations do not always change when they should and even when they do change they often experience failure. Research suggests that up to percent of organizational change efforts fail.3 e will examine several models of organizational change that attempt to model understand and mitigate these reasons for failure.

// MODELS OF ORGANIZATIONAL CHANGE There are many models of organizational change. n this section we will examine the view of organizations as open systems and how this view impacts our understanding of organizational change through three asic models that form the asis of most models of change. The first is a generic model of change that demonstrates the attri utes that are common to the many models of organizational change. The other two models include a model of planned change followed y a model of emergent change.

ORGANIZATIONS AS OPEN SYSTEMS The term system refers to a set or arrangement of interrelated parts that interact to form a whole.4 rganizations are systems that comprise multiple su systems. corporate functional group such as the marketing department or the R department can e considered a su system within the organization as can the retail division of the firm. These su systems interact in complex ways. n open-system perspective views the organization not from the point of view of an individual su system or even groups of su systems ut from the perspective of the organization as a whole and its interaction with its environment. rganizations are open systems ecause they interact with their

Open systems A system that receives inputs from its external environment

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Strategic Human Resources Planning NEL224

external environment and ecause the internal su systems interact with one another.5 rganizations impact and are impacted y their external environment and y the other

su systems working within them. The unpredicta le and interconnected nature of these open system dependencies are primary reasons that organizational change can e so difficult and so prone to failure.

THE IMPORTANCE OF FEEDBACK pen systems are input-throughput-output systems in that they take or receive inputs

from their environment transform or convert those inputs and then output the finished products or services ack to the environment. The factor that defines the structure of an open system is its purpose goals are used as indicators of whether the system is functioning according to its purpose. The o jective of an open system approach in organizations is to structure and coordinate all the su systems in a manner that ensures that the firm is collectively pursuing its overall purpose.6 Therefore organizations must use feed ack to determine whether or not they are achieving their goals and ultimately their strategic purpose. Two asic forms of feed ack are positive and negative feed ack. egative feed ack is the kind of information that tells whether the system is achieving its

goal. For example the thermometer in your room operates through negative feed ack the set temperature is its goal and it will operate the heater until the room temperature rises to the set temperature efore shutting off. f an organization determines that it needs to produce pairs of shoes every month it will use negative feed ack to determine if its daily production is on track.

ositive feed ack on the other hand is the kind of information that a system uses to determine if its purpose is suited for its environment. ositive feed ack helps the organization to determine if it should e producing pairs of shoes a month or what styles of shoe it should e producing. rganizational change implementations must take into account the potential effect of changes on other su systems and on the environment and all models of organizational change incorporate methods for utilizing negative and positive feed ack into the design and decision-making processes around change. owever enefitting from feed ack implies learning. rganizations must also have systems in place for learning in order to use feed ack and different methods of learning are required to access negative and positive feed ack. hris rgyris a thought leader and noted researcher in the area of organizational ehaviour referred to these methods of learning as single-loop and dou le-loop learning.

SINGLE-LOOP LEARNING This type of learning is more related to pro lem solving in the form of identifying and correcting errors. Single-loop learning is the type of learning around negative feed ack and essentially seeks to learn how to achieve a set goal within the current set of governing varia les. Single-loop learning permits the organization or the individual to proceed according to the status quo and can impede change implementations especially when the change requires new and different goals. R lanning ote ook . discusses strate- gies for overcoming the tendencies to reinforce single-loop learning.

Single-loop learning The attempt to solve a problem using a single strategy, without exam- ining the validity of the problem itself

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NEL 225CHAPTER 9 Change Management

DOUBLE-LOOP LEARNING ou le-loop learning involves questioning the tacit assumptions and attri utions that

people have around their decision making. n organizational settings this involves questioning the extent to which the strategy itself and the systems and structures that implement the strategy support the underlying purpose of the organization. hen managers and employees examine the assumptions they have used to arrive at a point of view they are using dou le-loop learning that ena les them to ypass the assumptions that may e locking them into a particular frame of mind and preventing them from viewing the pro lem from a different perspective. Double-loop learning is typified y encouraging participation in decision making and open expression of conflicting views using valid information and widespread and open testing of evaluations.

The success of organizational change is therefore dependent on the methods of feed ack that organizations use the validity of information that is gathered and shared the alignment of goals to the organization s purpose and to the change implementation and the extent to which dou le-loop learning is fostered. Models of change must allow for these factors to e considered and differences etween models of change often come down to issues relating to the scale of the change or method in which these varia les are taken into account.

Double-loop learning A method of learning that involves ques- tioning current assumptions, exam- ining a problem from different perspectives, and questioning the validity of the problem

HR PLANNING NOTEBOOK 9.1

OVERCOMING SINGLE-LOOP LEARNING

Single-loop learning can prevent the learner from devel- oping an understanding of underlying or root issues. It is typified by the following values:

1. The desire to remain in unilateral control.

Predetermined goals and existing methods of achieving those goals provide a sense of control. It is generally easier to change the things that fall within our direct control than to change things that are not. For example, when asked to find ways to increase profits, managers often seek to cut costs, which are known and within the control of managers, than to increase revenues, which are less certain. One way to reduce the tendency to want to remain in unilateral control includes allowing more democratic and inclusive methods of decision making by pushing decision making to groups or giving individuals greater autonomy in decision making.

2. A focus on maximizing winning and minimizing losing. Success is important, and failure is difficult to accept. Organizations can increase their learning abilities by encouraging experimentation, and allowing members to make mistakes. Individuals and groups can move beyond defensive routines when they accept their mistakes, and learn from mistakes from a more objective frame of mind.

3. Leaving potentially threatening or embarrassing facts out of the decision-making process.

This tendency relates strongly to the previous point about the importance of encouraging experimentation. When errors can be career limiting or when they can negatively impact performance appraisals, it is only rational to want to ignore them. However, by accepting errors or misfires as part of the risk-taking process of creativity and innovation, learning can be enhanced.

Sources: C. Argyris, “Teaching Smart People How to Learn,” Harvard Business Review, 3 (1991): 99–109; and C. Argyris, R. Putnam, and D.M. Smith, Action Science, San Francisco: Jossey-Bass, 1985.

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// THE GENERIC MODEL OF CHANGE Many models recognize that the process comprises several critical periods of change as shown in Figure . . This figure represents an overview of the change process and incorporates the need for constant review of the change process as well as the need to monitor and adapt to the internal and external changes that may e affecting or caused y the change process.

RECOGNIZING THE NEED FOR CHANGE AND STARTING THE PROCESS This is one of the most difficult stages in the change process. hange requires not only that a need to change is identified ut that the need is roadly felt among all participants involved in the change process. ithout full uy-in from all stakeholders change efforts are likely to fail. nce the need for change has een identified the motivation for that change must e spread throughout the firm. This motivation can come in the form of incentives tied to organizational goals that are aligned to the desired outcomes of the change or in the form of a high-involvement high-commitment strategy that aligns employee values with organizational values. Successful change initiatives tend to involve management and employees in the process of discovering the pro lems and developing the solutions as this inclusive style tends to promote a shared understanding of the issues.

DIAGNOSING WHAT NEEDS TO BE CHANGED rganizational change is complex involving multiple stakeholders unpredicta le out-

comes and unexpected consequences. Models of organizational change tend to deal with the diagnosis of what needs to change y examining the leadership of the change process the overall purpose of the change and the degree of planning involved in the change process. ill leadership e a top-down style in which management determines what needs to change and communicates goals down through the organization or a ottom-up approach in which all levels of employees share in determining what needs

to change and teams are charged with developing plans of action s the purpose of the change to maximize the economic value of the firm y focusing on shareholder

Plan and prepare for

change

Diagnose what needs to change

Implement the change

Sustain the change

Recognize the need

for change

Source: Adapted from J. Hayes, The Theory and Practice of Change Management (3rd ed.), (New York: Palgrave Mac- Millan, 2010).

FIGURE 9.1

ADAPTATION OF HAYES’ GENERIC MODEL OF CHANGE

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Sanjana bindroo

NEL 227CHAPTER 9 Change Management

LEVEL OF INVOLVEMENT

SC O

PE O

F IM

PL EM

EN TA

TI O

CONSULTANTS OR TOP-DOWN MANAGEMENT TEAMS

ALL EMPLOYEES

System-wide change Tight structure. Top-down, planned change initiative.

Loosest structure. Emergent change, or combination of emergent and planned approach.

Change to solve a specific problem

Tightest structure. The problem, proposed solution, and implementation plan come from management. Incremental change intended to bring localized improvement.

Tight or loose structure, depending on organization culture and management approach to the problem.

value—in which case a top-down approach may e utilized—or is the purpose to develop the human capa ility to implement the firm s strategy where a ottom-up approach may e a etter choice s the level of planning detailed with firm goals and a timeline outlined from the eginning or is the planning loose with a general direction and plenty of room for experimentation ll these manifestations of change planning can e successful ut they must e implemented in suita le situations. hange models

help the strategic planner to understand how to use these methods.

PLANNING AND PREPARING FOR CHANGE The type of change intervention that will e most successful will depend on the orga- nization culture leadership timeline availa le for the change to e implemented and the purpose of the change. rganizations commonly take implementation approaches that vary in the degree to which organizational mem ers are involved in the change and the scope of the implementation ranging from change ased on the identifica- tion of a specific pro lem to change ased on changing the entire system as shown in Figure . . For example changes ased on a specific identified pro lem such as the adoption of a new R information systems R S technology platform might have the potential to affect a road population within the organization however this type of change initiative might e addressed using a top-down managerial approach. Senior managers within R might request an RF from several prominent R S providers make a decision using feed ack from usiness unit level R managers and roll out training along with the new system to the roader organization upon implementa- tion. This example of a narrow level of involvement for a road implementation can e contrasted against change implementations that seek to involve a much roader

group of stakeholders. The proliferation of high-involvement often referred to as high-performance work practices in recent years suggests that firms are moving more

FIGURE 9.2

COMMON CHANGE IMPLEMENTATION STYLES

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toward greater levels of employee involvement in organizational decision making and change implementation. n example of a high-involvement work practice is a gain- sharing compensation plan where employees are rewarded for reducing production costs and increasing organizational efficiencies. Such a plan motivates employees to think creatively a out developing and implementing new ways to e more efficient.

More tightly structured and larger-scale changes will require many changes to orga- nizational systems and processes while loosely structured changes will require deep organizational learning around the firm s vision and values. s organizations seek to involve more constituents in the process of developing and implementing change the structures that guide the change process including goals levels of autonomy in decision making and feed ack systems tend to e roader and more loosely controlled. ccording to ohn otter good leaders tend to focus on setting direction rather than plan align people to a common purpose rather than organize them and motivate people to move in a particular direction rather than pro lem solve around the systems and processes used to push people in a particular direction. This view of leadership suggests that any change process should egin with the esta lishment of a clear understanding of the firm s overall vision and direction. hen anchored around a common understanding of the firm s vision highly structured change implementations can e constructed such that all the goals processes and practices that are intended to move the organization in the direction of the change are internally aligned. common understanding of the firm s vision is even more important to loosely structured change initiatives where leadership tends to express very loose goals around which organizational processes and practices emerge. For example o alvin of Motorola in helped to transform the company y challenging his executives to renew the organization. Such a challenge would lack impact or even meaning without a strong understanding of the firm s roader purpose.

Employees often have very good ideas about how to improve processes.

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NEL 229CHAPTER 9 Change Management

IMPLEMENTING THE CHANGE mplementing change demands particular skills from oth the change leaders and those involved in the change. Successful change leaders rely on their a ility to make use of the complex social networks that connect people within organizations and their political skills which can e defined as the a ility to persuade manipulate and negotiate to achieve a particular outcome. Social networks in organizations are rarely reflected y the formal reporting structures. These networks are instead ased on the extent to

which people routinely communicate with one another and whom people turn to for information relating to getting their work done. Social networks in organizations can e complex and very difficult to o serve and employees who ecome influential mem ers of a social network are often those with high levels of firm-specific human capital in that they are instrumental to getting work done or helping others to get work done etter or faster. n influential role in a social network can therefore e a very important

tool in helping to achieve uy-in from others around the importance of the change initiative and in ringing a out shared mental models of the firm s vision and purpose.

olitical skills are also important in achieving widespread uy-in for a change ini- tiative. ersuading others is rarely done using a single convincing argument. Rather persuasion is a process that involves listening to others learning a out the positions and perspectives of others and incorporating those views into an argument see R lanning ote ook . for tips on how to increase persuasiveness . ersuasive skills are quite similar

to the dimensions of political skills which include social astuteness interpersonal influ- ence networking a ility and apparent sincerity. eaders involved in a change process must to e a le to exercise political and persuasive skills and to draw from social networks in order to ensure the success of the change implementation.

Social networks The networks of ties that an individual has with other individuals

HR PLANNING NOTEBOOK 9.2

THE SCIENCE OF PERSUASION

The ability to persuade others is an important skill not only for managing change but also as a general leadership skill. A good argument requires support and understanding from others, and those who are better able to supplement a strong argument with persuasive skills are more likely to find that support. One model of persuasion suggests that there are four steps to persuading others:

1. Establishing credibility with the audience by demon- strating expertise and gaining trust. People are less likely to follow those whom they do not trust. An important first step is to help others to see how your position is informed through expertise, and that you are a trustworthy source.

2. Framing your position in a way that will appeal to the audience by emphasizing the advantages. The way in which people respond to ideas is partly dependent on the way the information is presented, or framed.

This is done in politics, of course, where politi- cians choose words carefully to elicit an emotional response that frames an issue in a preferred manner. For example, referring to the US Patient Protection and Affordable Care Act (otherwise known as Obam- acare) as socialized medicine or as health insurance reform frames the act in very different ways that produce potentially different responses. Strong persua- sive skills involve framing an argument in a manner that the audience will be able to relate to and find appealing.

3. Providing evidence through the use of supporting data and appealing stories, metaphors, or analogies to help the audience visualize your position. Metaphor is an excellent tool for communicating something new or different by relating it to something with which people

(continued )

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are already familiar. For example, children who are not equipped with language to describe sensations like a foot falling asleep will communicate the odd feeling using a metaphor such as “a hundred bees are buzzing on my foot.” People skilled in persuasion help others to understand their position by creating shared mental models to describe unique, novel, or abstract ideas.

4. Connecting emotionally by matching the emotional state of the audience. To do this, good persuaders require emotional intelligence. Emotional intelligence involves an ability to be aware of and capitalize on one’s own emotions and the emotions of others. Effective persuasion requires an emotional appeal in addition to a rational argument.

Source: J.A. Conger, “The Necessary Art of Persuasion,” Harvard Business Review, 76 (1998): 84–95.

SUSTAINING THE CHANGE mplementing organizational change also requires a firm-wide approach to ena le the change process regardless of its scope. hange initiatives that are of a narrow more focused approach may make use of a new usiness process with a commensurate level of training around the new process whereas large-scale change initiatives may involve many unknowns that cannot e completely anticipated. Such changes require organi- zational learning and experimentation in order to plot a successful change path. e will cover two prototypical models of organizational change in the next section that address how organizational change can e implemented.

nce change has een implemented steps must e taken to ensure that the organiza- tion does not slip ack into its pre-change mode. hile new methods or processes can e put into place these methods will likely not endure if they do not fit with the firm s culture or if they are not incorporated into existing mental models of how things work within the organization. For example despite the potential enefits of merging to oth aimler and hrysler in terms of expected market development and resource sharing and despite all the

systems put in place to merge these two firms the inattention to integrating the cultures of these two very different firms ultimately led to one of the most nota le merger failures in the auto industry. Sustaining change usually involves a set of measures to provide feed ack to the organization that indicate when goals that relate to successful change are eing met and systems that can lead to the development of adaptations when those goals

are not eing met. R lanning Today . provides an example of how an organization uses mental models and its a ility to adapt to navigate through a rapidly changing market.

HR PLANNING TODAY 9.1

ORGANIZATIONAL CHANGE AT YOU.I

You.i is a young Canadian high-technology firm based in Ottawa, Ontario. Change in the high-technology industry is constant and fast paced, especially in small firms that are in the process of developing a market niche (i.e., a portion of the market that contributes value to the consumer, and is not currently being served, or is underserved). Jason

Flick, co-founder and Chief Executive at You.i, explains that the vision behind the firm is “to bring the best user experi- ence to all screens.” This vision is focused on the video market space, and is further enlivened by the guiding prin- ciples of having well-designed workflow, cross- platform capability (i.e., it works on all hardware platforms including

(continued )

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NEL 231CHAPTER 9 Change Management

// THE PLANNED MODEL OF CHANGE t has een argued that urt ewin s three-step model of planned organization change is the model around which most su sequent change models were conceived. urt ewin was a ehavioural psychologist who focused much of his work on

situational and group influences on individual ehaviour. ewin developed the three- step model in the early s as part of the lanned pproach to change that comprises four elements in total field theory group dynamics action research and the three-step model. Together these four elements form an interrelated approach to understanding and developing solutions to change pro lems. e will riefly touch upon each of these elements while focusing more on the three-step model.

smartphones, tablets, and computers of all major brands), and high performance (such as quick video rendering, fast loading and response, etc.). You.i seeks to keep its vision at the forefront of employees’ minds by making the vision a focal point during product meetings. You.i con- ducts several employee retreats every year in which all employees are brought together to discuss and have input on what the vision means at You.i and how it impacts their work. Flick further explains that the company’s vision is communicated to both employees and customers through the creation of prototype software. The software is only for demonstration purposes, and shows how You.i envi- sions the future blending of art and science in the world of video streaming. Its purpose is to not only give potential customers an idea of what You.i can do, but also help to affirm the aspirations of the employees at You.i, and give them the opportunity to bring You.i’s current vision to life, to give it substance.

In a recent example of change, You.i was working on a video streaming solution that was intended to extract the highest video performance from smart devices that did not have a built-in graphics chip. However, rapid advancements in the hardware configurations of smart devices led the team at You.i to realize that the market was moving toward a widespread use of graphics chips in these devices. You.i had to make a major change in its organizational activities. Management decided to abandon some of their high-priority projects relating to maximizing video performance without using the graphics chip; but this shift in focus remained true to the overall vision and the guiding principles of You.i. As a result, much of the learning that went into the abandoned projects served as a springboard to guide the resulting projects, ultimately

leading to a rethinking of You.i’s rendering engine, and a subsequent breakthrough in the speed of its video ren- dering software. The speed of You.i’s rendering software is a critical aspect of one of the guiding principles, and is a strong differentiating feature of You.i’s product in the marketplace. In this change incident, You.i quickly realized that the mental models it was using around how to imple- ment its vision of bringing “the best user experience to all screens” were no longer relevant due to changing environ- mental conditions, and adapted new mental models around how to deliver its vision. When organizations are focused on a clear understanding of a future vision, and carry the ability to adapt and learn, environmental changes can bring opportunities where other firms may see a dead-end.

Source: Based on interview with Jason Flick, President and CEO, You.i, and Deborah Naczynski, Head of Education and Outreach, You.i.

Vision and the use of mental models helped make You.i a success.

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Strategic Human Resources Planning NEL232

FIELD THEORY ewin developed field theory as an approach to understanding and changing individual

or group perceptions and ehaviours y seeking to understand the interdependent forces that act on individuals or groups and that motivate them toward certain courses of action and restrain them from others. ccording to ewin the totality of all the psy- chological forces i.e. their needs goals and intentions that maintain an individual s or group s set of ehaviours in a given situation such as home life or work life can e descri ed in what ewin called a life-space. The forces acting on a particular life-space are always in flux always changing ut they form a state of quasi-equili rium which is referred to as the status quo. The status quo can e changed y altering the forces that make up the life-space. ehavioural change is therefore a matter of understanding the forces that act on an individual s or group s life-space and reinforcing those forces that act to move the individual or group toward the desired ehaviour and reducing the strength of the forces that act to prevent the individual or group from moving toward the desired ehaviour. The analysis of these forces acting on individuals or groups is also called force-field analysis.

FORCE-FIELD ANALYSIS

The purpose of force-field analysis is to analyze a condition and to plan corrective actions. s Figure . shows the analysis egins therefore with a statement of the current state

or condition and a statement of the desired future state or condition. The analysis then attempts to plot the forces that are supporting or driving toward the future state as well as the forces that are restraining the future state from eing put into action. force-field analysis is an important first step in a change plan see R lanning ote ook . for the steps in conducting a force-field analysis . t helps organizations to identify issues y requiring change planners to first identify a future desired state rather than to focus

solely on existing pro lems. t also helps planners to identify suita le courses of action to initiate a change implementation.

Force-field analysis A framework for ana- lyzing a problem that seeks to identify all the relevant factors and stakeholders that are acting to either sustain the current state or to move away from the current state

Driving Forces Highly skilled, motivated employees Strong organizational culture of pride in good work Managers are highly respected by subordinates Employees respect one another within functional

departments Functional departments have frequent and

productive meetings Organization has a clear vision

Restraining Forces No measures of team effectiveness No measures of team coherence Team purpose is not always clearly stated

No formal structure for managing teams Individuals not given adequate time to devote to team

responsibilities Some functional departments feel like they are more important

than others Organizational culture supports friendly competition

between employees Technology does not support interdepartmental

collaboration

Current condition: team coherence is at an all-time low

Desired condition: increase team effectiveness and communication within 1 year

Source: Based on W.L. French and C.H. Bell, Organizational Development: Behavioral Science and Interventions for Organizational Improvement (6th ed.) (Upper Saddle River: Prentice-Hall, 1999).

FIGURE 9.3

FORCE-FIELD ANALYSIS

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NEL 233CHAPTER 9 Change Management

HR PLANNING NOTEBOOK 9.3

FORCE-FIELD ANALYSIS

Force-field analysis can be used as a problem-solving tool as well as a change management tool. Some of the benefits of a force-field analysis include the development of a strong understanding of the current situation, and a clarification around how it differs from an ideal future state or situa- tion. Force-field analysis can be used to decide whether a change is appropriate and, if so, what actions should be taken to move toward the new direction. French and Bell break the force-field analysis down to the following steps:

1. Describe the current state (i.e., the status quo), and why it must be changed. Ultimately this will lead to a statement of the current condition such as “team coherence is at an all-time low.”

2. Describe the desired future state. The future condition should ultimately be described in a sentence or a few sentences, such as “increase team effectiveness and communication within one year.”

3. Identify the forces that are supporting or driving toward increasing team coherence as well as the forces that are restraining or preventing increased team coherence. Techniques that access a wide variety of stakeholder viewpoints such as surveys, brainstorming sessions, and nominal group technique might be useful to perform this step.

4. Examine the valence of each of these forces. Which forces are the strongest and which are the weakest? Which of these forces can be controlled or are sus- ceptible to behavioural intervention?

5. Develop strategies to reduce the strength of the restraining forces and strategies to amplify the driving forces.

6. Implement the strategies developed in step 5. As restraining forces are reduced in strength and number and driving forces are amplified and increased in number, behaviours should begin to shift toward the desired state.

7. Develop strategies to stabilize the driving and restraining forces into a new state of quasi-equilib- rium. How do we make this the new status quo? After using a force-field analysis, organizational

planners can begin the process of moving toward the future state through a series of trial-and-error attempts to implement the strategies developed in step 5 to reduce restraining forces and amplify the driving forces. After moving to the new state, planners must develop strate- gies to stabilize the driving and restraining forces into a new state of quasi-equilibrium; to turn the change into the new status quo.

Source: W.L. French, and C.H. Bell. Organizational Development: Behavioral Science and Interventions for Organizational Improvement (6th ed.) (Upper Saddle River: Prentice-Hall, 1999).

GROUP DYNAMICS group can e any aggregation of two or more people. roups can e assem led

for a specific purpose or task or groups can form spontaneously as a result of people assem ling around a common cause e.g. an audience at a concert or a social network at work or witnesses at the scene of a car accident . hile not all groups have formal rules or codes of conduct they develop norms over time that govern or constrain the ehaviours of the individuals who comprise the group. Thus a group is more than

merely the sum of the individuals within it a group esta lishes normative ehaviours that alter the actions of group mem ers.

ewin elieved that organizational change could e achieved only y changing ehaviours at the group level. ccordingly efforts focused on changing individual ehaviours alone would e insufficient to ring a out effective and sustaina le change.

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Strategic Human Resources Planning NEL234

n other words individual ehaviour in organizational settings is to some extent a func- tion of the group setting. hange implementations must e viewed from the perspective of the group which involves focusing on the values norms and roles within the group.

ACTION RESEARCH hile an important stage in the change process is understanding that the status quo is

not sustaina le the decisions around what needs to change are filled with uncertainty and risk. ewin elieved that change is most likely to succeed when stakeholders are involved in oth making and implementing decisions. This implies a level of interac- tion etween research and practice where y the practitioners are also the researchers. Action research is theory ased ut rather than seeking findings that are universal or generaliza le across all situations it is em edded in the specific context of the practi- tioners and is intended to help identify and solve practical pro lems in a methodical evidence- ased manner. Figure . shows the five stages of the cyclical process of action research. s practitioners move from diagnosis to planning taking action evaluating the outcomes of those actions learning ased on the outcomes and ack to diagnosing this cyclical process is intended to spiral deeper toward greater insight into the pro lem and its ultimate set of solutions as new learning occurs through each cycle. ction research is used in many fields including management education sociology psychology anthropology and politics to name a few.

ne of the main enefits of action research is that each of the successive steps taken to implement change is ased on input from stakeholders and uses information from prior steps. hen each step of an implementation informs the following steps using action research it is possi le to understand how a change implementation can e methodical ut allow for improvisation and unpredicta ility in the process. The end result of such a process of inquiry may e quite different from the original pro lem definition as insights from each cycle of action research have the potential to lead to previously unanticipated courses of action.

Action research An iterative trial- and-error process of discovery that involves diagnosing a problem, planning a solution, acting on the solution, evaluating the results of the actions, learning from the outcomes, and asking new questions

Specifying learning

Diagnosing the problem

Action planning

Taking action Evaluating outcomes

FIGURE 9.4

THE PROCESS OF ACTION RESEARCH

Source: Adapted from G.I. Susman, Action Research: A Sociotechnical Systems Perspective, ed., G. Morgan, pp. 35–113 (London: Sage, 1983).

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NEL 235CHAPTER 9 Change Management

THREE-STEP MODEL This model is the main component of the lanned Model of hange and is the primary change framework for this chapter. The three steps of unfreezing moving and refreezing have ecome the foundation of many su sequent models of organizational change. ewin s choice of wording has led to criticisms of this model as some have argued that

the static notions of unfreezing and refreezing do not adequately address the need for models of change to incorporate the constant e and flow of change within organiza- tions. owever when the three-step model is em edded in the four interconnected elements of the planned model of change it ecomes clear that the model is far from static in its consideration of organizational change. To etter understand this we will examine the three steps of unfreezing moving and refreezing in closer detail.

STEP 1: UNFREEZING

s was discussed in the section on field theory and the force-field analysis ewin proposed that organizational conditions exist in a state of quasi-equili rium that is loosely maintained y opposing forces acting to drive and restrain conditions. ecause individual ehaviours

are partly dependent on group forces such as norms values and roles the equili rium rought a out y the various forces and y the norms values and roles within the group

must e desta ilized so that new learning new norms and new conditions can take root. great deal of research has een done on the tendency to resist change and the

unfreezing stage represents the part of a change process where resistance to change is roken down. The open-system view of organizations presupposes that organizations

like organisms tend toward homeostasis in that they try to maintain their equili rium in changing environments and are naturally change resistors. n addition to systemic sources of resistance to change individuals may resist change actively y finding fault in or ridiculing the change plan or passively y ver ally agreeing to a course of action ut failing to actually act y refusing to share information or y not following through

with plans. esta ilizing the status quo requires that resistance to change is overcome. R lanning Today . shows how M avoided imminent ankruptcy y unfreezing

and changing its long-standing culture and organizational activities. dgar Schein is a social psychologist who expanded on ewin s three-step model y suggesting that the process of unfreezing requires three conditions to unfreeze current ehaviours 22

. Disconfirmation of the validity of the status quo: ssentially this means that stake- holders must e convinced that the current modes of ehaviour and way of doing things are no longer successful paths to achieving goals. This is done y

. Inducing survival anxiety: ndividuals and groups must develop a sense of survival anxiety or pressure to change in order to overcome resistance and to move away from current ehaviours and toward new learning and new ehaviours. owever new learning and new ehaviours carry with them

learning anxiety or the fear of failure. n the context of a force-field analysis survival anxiety can e considered a driving force and learning anxiety a restraining force. Therefore moving away from the status quo would require oth increasing the driving force and reducing the restraining force learning

anxiety . Schein suggests that decreasing learning anxiety can e facilitated y . Creating psychological safety: sychological safety is the elief that an individual

can take certain risks and openly discuss workplace issues without fear of reprisal or threat to mental well- eing. Schein recommends that psychological safety can e increased through interventions such as providing a strong organizational

Unfreezing As the initial stage of organizational change, unfreezing involves the development of a shared understanding among stakeholders that a particular change is necessary

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Sanjana bindroo

Strategic Human Resources Planning NEL236

vision consistent systems and structures training role models and support groups as well as y involving the learner. Thus unfreezing requires that stake- holders develop the understanding that the current way of doing things is no longer accepta le that continuing along the current path will lead to mean- ingful negative consequences and that taking a risk on a new path or expressing new ways of doing things will not e judged negatively. ithout satisfying these three conditions change efforts are likely to e hampered y resistance.

HR PLANNING TODAY 9.2

UNFREEZING AT IBM

For decades IBM was considered a model corporate enter- prise. IBM hired the smartest employees and gave them an excellent working environment and job security; customers knew that they could trust IBM’s information technology and management solutions. It was a safe bet to buy IBM prod- ucts and services. But by the mid-1990s, IBM was quickly running out of cash, and heading toward disaster. In the mid-1970s, IBM focused its resources on large mainframe computing, when the market was headed to miniaturized, stand-alone workstations. As the market for mainframe computers quickly dwindled through the 1980s and early 1990s, IBM did not have the resources to develop a com- petitive advantage in the personal computing market. As well, the corporate culture at IBM that had been developing since the early 1960s was very strong: IBM was focused on developing and implementing integrated, large-scale solu- tions, whereas the information technology market had been cut into segments, where smaller, faster innovators were capturing market share. Having been accustomed to market domination and success, the culture at IBM was highly resis- tant to change, even in the face of broad media criticism.

Senior management at IBM looked outside the firm for the first time in its history to hire a new CEO. They were looking for a change agent who could transform the company. IBM had become frozen in its current condition after years of market dominance; as its market began to disappear, the company lacked the ability to “unfreeze” to the point of its near demise. When Louis Gerstner took over as CEO in 1993, he set about unfreezing this behemoth of a company. By that time, employees had a strong sense that the status quo was no longer viable. Revenues from the mainframe computer market had fallen by more than

50 percent over the course of a couple of years, and the media coverage of IBM’s woes had helped push several banks to reconsider their lending situation with IBM. The company that had a reputation for “no layoffs” had seen the departure of roughly 120,000 employees in just three years.

To instill psychological safety, Mr. Gerstner called upon IBM’s original strategy of offering customers a complete, unified solution, but using different activities. He confronted the criticism of many media outlets that IBM had become too big to change this late in the game by suggesting that IBM eliminate its bureaucratic ways, and he dealt with the employees honestly by admitting that the days of no layoffs at IBM were gone; IBM would have to change its size and its core activities. After laying out the overall customer strategy and focus, Gerstner left much of the implementation to managers’ understanding of what the market needed. Rather than extensive planning, he wanted quick action, even if it led to occasional mistakes. Finally, Gerstner pointed out that while he was looking for small wins in the short term, this effort was going to take years.

IBM sold its last computer in 2005. Today it is the largest consulting organization in the world that connects hardware, software, and decision making to provide data analysis and information-based solutions to its customers. Many factors came together to bring about the unfreezing of IBM’s culture and strategy back in the early 1990s; the board of directors, employees, and U.S. media and society helped unseat the status quo, while Louis Gerstner did much to bring about a sense of psychological safety that allowed the firm to progress into the moving stage of change. Without these factors coming together, IBM would not be the successful firm that it is today.

Sources: L.V. Gerstner, Jr., Who Says Elephants Can’t Dance? Harper Collins e-books; “Chronological History of IBM,” 2009, www-03.ibm.com/ibm/ history/history/decade_1990.html; IBM corporate website www-03.ibm.com/employment/news/200908_volume3art2_realibm.html; and Business Week Magazine www.businessweek.com/chapter/mills.htm.

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NEL 237CHAPTER 9 Change Management

STEP 2: MOVING

The unfreezing and moving stages of the three-step model parallel the action planning process. The unfreezing stage involves identifying the pro lems and action planning around methods of enhancing the driving forces and reducing the restraining forces that have een identified in a force-field analysis and the moving stage of the three-step model focuses on taking action and evaluating the outcomes of those actions. ewin mentions that the com- plexity of the interplay etween the forces involved in change renders outcomes impossi le to predict. Thus the moving stage is the process of trial-and-error that can cycle ack and forth etween unfreezing and moving as change agents monitor the strength and effects of the moving process on driving and restraining forces. Successful movement requires experimentation where mistakes can occur. rganizations that encourage experimentation must also develop a culture in which mistakes are accepted as part of the learning process.

rganizational cultures that do not accept mistakes or that punish employees for mistakes will generally lead to defensive routines and single-loop learning.23 hen dou le-loop learning is employed during this step change agents not only strive to achieve movement in the direction of the originally proposed change ut also seek to determine whether the original set direction or outcome is still the most important or relevant goal. This iterative process of action and research continues until a set of ehaviours values and attitudes that are consistent with the overall change effort are achieved.

STEP 3: REFREEZING

The purpose of this stage is to esta lish new norms and modes of ehaviour that are likely to reinforce the change that has taken place. The term refreezing may suggest that the organization is placed in a new form of stasis ut recall that the quasi-equili rium that ewin refers to in the unfreezing stage refers to a alance of forces that are supported y a set of norms and ehaviours. nless there are new group norms and routines to

support individual ehaviours ewin suggests that changes to individual ehaviour will regress to their pre-changed state. n this phase organizational structures processes and systems such as new compensation and enefits plans revised selection criteria training initiatives jo designs or team or reporting structures are put into place to reinforce new cultural norms. The lack of attention to refreezing may e exemplified y the nature of popular organizational management techniques such as outsourcing or T M which rapidly ecome management fads and then quickly lose some of their popularity as the intended enefits fail to emerge for many firms. The implementation of these techniques themselves may e clearly codified and followed ut the development of organizational structures and practices to root them into the newly changed system may not e given sufficient managerial attention to allow them to flourish within the organization.

// DEVELOPMENT OF THE PLANNED CHANGE APPROACH lanned change has endured since ewin s approach was introduced in the s and

has een further developed in many ways y many researchers and practitioners. ne of the more popular approaches is ohn otter s eight-step model of change.24 You may not e surprised to learn that this approach ears many similarities to ewin s model which

suggests that the overall process has endured the test of time. otter s eight steps and

Moving As the second stage of a change process, the moving stage involves the trial-and-error pro- cess of taking action to move the firm through the intended change

Refreezing The third and final stage of a change initiative, refreezing involves putting policies, practices, and structures in place to establish new norms around the change

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Strategic Human Resources Planning NEL238

their relation to ewin s planned approach are shown in Figure . . The first three stages of this model which include establishing a sense of urgency forming a guiding coalition and creating a vision are clearly activities that mirror ewin s unfreezing stage. The next four stages move the change process and even include the reiterative nature of cycling etween unfreezing and moving y communicating the vision empowering others to act

on the vision planning for and creating short-term wins and consolidating improvements and producing more change. Finally institutionalizing new approaches clearly reflects the refreezing process. ommon to all models of planned change is the assumption that change is a process that can e segmented into discrete and necessary steps that organizations all pass through en route to successful change. otter warns that the change process usually takes more time than managers suspect and that skipping steps in a planned change effort in the hope of saving time or increasing efficiency is unlikely to yield positive results.25

// EMERGENT CHANGE ll planned approaches to change assume that change is initiated at the top of the

organization ased on identifia le and defina le issues has discrete steps and includes a eginning and end point. This planned linear approach might e used in a situation such as the implementation of a financial incentive plan that is designed to etter align employee goals with organizational goals. owever if the change plan recognizes that change must take place ut has difficulty identifying the exact courses of action to take and has goals that are roadly defined—for example a goal to improve customer service the planned approach can e overly restrictive. Furthermore as ewin s notion of quasi-equili rium ased on a alancing of opposing forces suggests change is often complex dynamic and unpredicta le. rganizations are complex systems and rela- tionships in such systems tend to e nonlinear and highly interconnected which lead to unintended consequences.26 These characteristics evoke a process that is much more chaotic than the carefully controlled nature of the planned approach to change. hange researchers have recently egun to em race the chaotic nature of change y applying chaos theory to models of organizational change.

FIGURE 9.5

RELATIONSHIPS BETWEEN LEWIN’S THREE-STEP MODEL AND KOTTER’S EIGHT-STEP MODEL OF CHANGE

Kotter’s 8-step Model

viii) Institutionalize new approaches

i) Establish a sense of urgency

iii) Create a vision ii) Form a guiding coalition

iv) Communicate the vision v) Empower others to act on the vision

vii) Consolidate improvements and produce more change vi) Create short-term wins

- Disconfirm the status quo - Create psychological safety

- Experiment

- Reinforce new norms and behaviours

Unfreezing

Moving

Refreezing

Lewin’s 3-step Model

Source: J.P. Kotter, “Leading Change: Why Transformation Efforts Fail,” Harvard Business Review, 85 (2007): 96–103.

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NEL 239CHAPTER 9 Change Management

CHAOS THEORY AND EMERGENT CHANGE The development of organizational management over the past century has een focused on esta lishing order from chaos through systemization and control. Chaos theory recognizes that attempts to do this assume that the future can e oth known and to some extent controlled. owever scientists have learned that even models that perfectly match dynamic systems cannot predict the outcome of that system at a given point in time. For example you may e familiar with the children s toy that is a pendulum with a magnet at the ottom of the pendulum as well as a magnet on the ase of the toy underneath the pendulum. hen the pendulum is put into motion the two magnets interact to make the pendulum move in chaotic patterns. hile it is possi le to predict things like the average distance the pendulum will e from the ase at a given moment or the average length of time the pendulum will remain in motion it is impossi le to predict the exact position of the pendulum at any given moment during its travels. The properties of the system interact with one another in unpredicta le ways to produce outcomes that simply cannot e predicted with accuracy.

This is the essence of chaos theory and it flies in the face of the popular ewtonian worldview of usiness as a controlla le predicta le machine. e tend to think of chaos as a complete lack of order however from a scientific perspective chaos refers to a form of disorder in which ehavioural patterns emerge in unpredicta le and yet similar ways. hile the perfect model of a dynamic system may not e a le to perfectly pre- dict the state of that system at a given point in time the model will produce outcomes that are consistent with the ehaviour of that system. This can e understood through the myriad examples of the outcomes of chaos theory in our daily lives for example through the way snowflakes are formed y the same process that leads to all having six sides and yet each is unique. haos theory has een used in the study of usiness to demonstrate how small changes in the function of supply chain models can lead to unpredicta le outcomes. n short chaotic systems produce recogniza le patterns with unpredicta le outcomes.

n the context of managing change chaos theory provides a frame for understanding how a roadly defined goal such as to improve customer service can provide the asis on which successful change can e patterned. ee ock former of isa coined the term chaordic organization a com ination of the words chaos and order to descri e a management style where y firms focus less on structure and control and more on a guiding purpose. clearly understood and shared guiding purpose provides the order necessary for organizations to spontaneously develop their own structure and system.32 Teten aum33 points out that chaos is actually governed y underlying rules and in

ock s chaordic organization those rules are the firm s purpose and the principles that guide employees toward ehaviours that are harmonious with that purpose. xamples of chaordic ehaviour in nature are the tendencies for irds to flock together or fish to swim in tightly coordinated schools.34 Flocks of irds dart through the air with a degree of coordination that suggests an extremely high level of communication and integration.

ow is a signal to turn in a particular direction transmitted instantly through a flock of hundreds of irds raig Reynolds a software engineer developed a computer simulation model of the flocking ehaviour of irds using three simple rules separation avoid crowding other mem ers of the flock alignment steer towards the average direction of other mem ers of the flock and cohesion move toward the average position of mem ers of the flock. These three simple rules created a model of flocking ehaviour that replicates the flocking of irds so well that it was adopted y ollywood to create ird and at flocking animations in the Batman Returns movie.35

Chaos theory Complex systems are based on some form of order but can behave in unpredictable ways. The unpredictability of these systems results from the many interactions of the system variables and the consequences of differences in the initial states of those variables

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Strategic Human Resources Planning NEL240

sing the principles of chaordic ehaviour to manage change therefore suggests that emergent change is a ottom-up process in that it originates from and is enacted y all mem ers at all levels of the organization and that it is guided y simple principles that are widely held throughout the organization. For example pple s success can in part e attri uted to the fact that all the company s products demonstrate a commit- ment to their guiding principles of ease of use integration of products and innova- tive industrial design. ne can imagine that when developing innovations at pple hardware engineers software engineers and designers all have these guiding principles at the forefront of their thinking which may explain why pple s new products have een consistently successful. For another example of how organizational values can e

used to guide organizational change see R lanning Today . . The idea of a chaordic organization also suggests that firms must focus on creating

systems and structures that communicate the guiding principles in a consistent and unam iguous manner on giving employees the skills and autonomy to e adaptive in their environment to leverage diversity to roaden the creative scope of the firm to make use of teams so that employees can interact and develop ideas and to encourage informa- tion sharing among employees.36 hange in the context of a chaordic organization is an emergent phenomenon rather than planned. hange occurs as a form of adaptation and as a result of learning and so the most important attri utes an organization can develop in order to promote emergent change are those of a learning organization. R lanning Today . discusses how the process of emergence is changing an entire industry.

HR PLANNING TODAY 9.3

EMERGENT CHANGE THROUGH VISION AND VALUES AT KINDRED CREDIT UNION

An important element to successful emergent change is a shared understanding of the simple rules that drive the system. Credit unions are member-owned coopera- tives in which members can draw low-interest loans from pooled deposits. Kindred Credit Union centred in Kitchener, Ontario, is such a cooperative, where mem- bers agree to embrace a faith-based set of convictions. By sharing similar religious beliefs, members develop rich mental models of the guiding principles of the Kindred Credit Union, which are integrity, compassion, and responsible stewardship. These institutional values are directly associated with personally held religious values, which imbue the credit union’s values with deep meaning and an understanding of the kinds of actions and behaviours that reflect those values. Furthermore, a main purpose of this credit union is to! invest in the local community, and to return profits to the members. As such, the institution exists to serve the needs of its members.

When an organization is able to clarify and consistently message its members around its central principles, and when members identify strongly with the purpose of the organization, then member activities are likely to comple- ment the needs of the organization. In a credit union, this means that members are less likely to abuse the credit- granting aspects of the institution, thereby lowering costs of defaults for all members. The kinds of loans that are granted and the types of services that are offered to mem- bers are not determined by what competitors are offering, or whether the organization can achieve economies of scale or scope through these activities, but whether the activities serve the needs of the members. When it comes to orga- nizational change, a strongly shared understanding of the central principles and purpose of the organization can lead to thinking, actions, and innovations that are in step with the needs of the organization. Rather than stating a specific need or even a specific goal, these institutions develop nec- essary capabilities spontaneously and as the need arises.

Source: https://www.kindredcu.com/AboutUs/

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NEL 241CHAPTER 9 Change Management

// ORGANIZATIONAL LEARNING ow does an organization improve its products its services its manufacturing process

or its customer service Should strategy always e developed at the top of the organi- zation and implemented down to the usiness lines Should change f not how can strategy or change come from the ottom of the organization Top-down strategies for learning strategy development or change can involve focus groups customer surveys six-sigma or T M methods or formal training among other activities. The strategies

HR PLANNING TODAY 9.4

EMERGENCE AT THE INDUSTRY LEVEL: SPECIALTY COFFEE

Coffee is one of the most traded agricultural commodities in the world. It is also one of the most valuable com- modities exported by developing countries. As a com- modity-based industry, the market price for coffee is set according to its global availability more than its quality. Because of the speculation in coffee prices and the global reach of the coffee market, coffee farmers can lose money on their crops due to the fluctuations in the global price of coffee. In the commodity market, farmers deliver their crop to a central co-op, where their crop is combined with those of other local farmers, and the farmer is paid according to the going rate for green (unroasted) coffee. These coffees are then purchased by the large coffee buyers such as Kraft, Proctor and Gamble, and Nestlé.

The specialty coffee industry is the portion of the coffee industry that is focused on the highest quality coffee. Quality in coffee is defined in terms of the transparency of the process that led to the production of the coffee, from farm and soil, to how the coffee beans are separated from the coffee cherries, to transportation, roasting, and finally the brewing process itself. This is an industry that is emerging from the commodity coffee industry, and it has grown from 1 percent of the total coffee market in the 1970s to roughly 50 percent of the market today. A few of the companies leading the evolution of the specialty coffee industry include Intelligentsia Coffee (in Chicago), Stumptown Coffee Roasters (in Portland, Oregon), and George Howell Coffee (in Acton, Massachusetts). The values that guide this industry are quality and transparency. These values are associated with the principle that everything done to the coffee cherry once it is plucked from the tree can degrade the quality that is

locked into the bean. The process of delivering that bean to the cup must preserve as much of that quality as possible.

Guided by this principle and these values, the leaders in the specialty coffee industry travel to the areas where coffee is produced throughout the world and develop relationships with farmers who are inter- ested in adhering to these values. By doing so, the farmer steps away from the commodity market, and develops a purchase agreement with the specialty coffee retailer at rates well above the commodity market price. This begins the process of transforming not only the way the coffee is farmed, but also how the coffee is processed, and how it is transported from the farm in Ethiopia or Peru to the roastery in Portland or Chicago. Every farm and every geographic region has its own unique qualities and problems to overcome, and so the solutions can range from planting more shade trees around the coffee trees to long-term projects to bring water to remote farming communities to facilitate the washing and processing of the green coffees. Relationships in the specialty coffee industry are more intimate, where the retailer knows the farmer, and the farmer learns how his green coffees are brought to and consumed by the rest of the world. Problems are solved locally, and decision making is more democratic and is highly decentralized. The participants in this industry develop more of a system view of the coffee value chain, and every member of that value chain, from farmer to barista (and ultimately the consumer) understands the basic guiding principle and values, and each plays a role in the transformation and development of the specialty coffee industry.

Source: SCAA, “U.S. Specialty Coffee Consumption Report,” www.scaa.org/?page=resources&d=statistic-and-reports, retrieved March 12, 2015.

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Strategic Human Resources Planning NEL242

for ottom-up learning strategy development or change are very different. magine an organization in which the employees working in the assem ly plant to produce the same product many times over develop such a high degree of competence that they egin to find successful shortcuts or etter ways of assem ling the product or an organization in which the sales staff develop a rich understanding of what the customer is looking for in its products. mployees have direct contact with the products of their la our and can develop a highly nuanced understanding of their jo s and consequently how to improve aspects of the organization that are separated from senior management often y several layers of management. mployees also have a keen understanding of how

organizational processes fit together. ow many people do you know who have at least one story a out an organizational process or practice that makes no sense or that runs contrary to stated organizational o jectives f the firm could harness the knowledge in these employees and further encourage this kind of inquisitive thinking it could tap into a diverse and almost limitless source of innovation and improvement. eter Senge discusses the concept of organizational learning in his seminal ook The Fifth Discipline which explains the concept and enefits of organizational learning and outlines the necessary conditions for organizational learning.

ne of the first aspects of organizational learning is to move away from viewing the organization from the perspective of a singular focus such as maximizing share- holder value. Such a single-minded o jective tends to engender single-loop learning and rings with it the difficulties of trying to predict and ring a out a particular future state. nstead Senge suggests that our primary tasks in complex human systems are to ecome more reflective on the reasoning that guides our actions and to gradually improve our theories in use. This sounds very much like dou le-loop learning as it requires managers and employees to re-examine the practices processes and assump- tions that guide current activities.

Senge further suggests that rather than ecoming focused on specific numeric goals which have the potential to limit our natural tendency to try to make sense of our overall environment organizations should seek to promote the learning processes that people would otherwise use to improve. These natural learning processes are sup- ported through the principles of a learning organization. Thus organizational learning is one of the most important attri utes necessary to ring a out emergent change. The elements of organizational learning comprise personal mastery mental models building a shared vision team learning and systems thinking.

PERSONAL MASTERY

eveloping personal mastery is not necessarily a out ecoming very good at what one does although people who have a high level of personal mastery do ecome very good at what they do. Personal mastery has more to do with personal devel- opment a commitment to learning and to achieving what one really wants one s personal vision. ision flows from a sense of purpose. here purpose can e thought of as a vocation a calling what one truly cares a out in life vision rep- resents a picture of where one wants to e. oals provide measura le markers of success toward that vision. Think of what you would like to e doing professionally in five years how does this vision connect with your sense of purpose o you have goals to help you to indicate whether you are on track with your vision ow imagine that you get that jo . hat comes next for you Re-esta lishing a new

Organizational learning An approach to learning that applies double-loop learning and an attempt to understand how the entire system may be affected by change. Organizational learning allows knowledge from any individual in the organization to become incorporated into the firm’s culture and processes

Personal mastery The understanding of one’s purpose and the development of a per- sonal vision

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NEL 243CHAPTER 9 Change Management

vision that is connected to your purpose is the source of energy that people with a strong sense of personal mastery use to propel themselves through life. hen organizational change is connected to a clearly articulated organizational vision and that vision connects with the individual Senge suggests that personal mastery will lead employees to e more committed to their work and take more initiative at work. Senge further suggests that organizations can actively promote personal mastery in the workplace through uilding climates that foster the development of personal visions that encourage frank and open discussions a out the workplace and that question the status quo.42

MENTAL MODELS

These are the organized knowledge structures that individuals use to help navigate the volume and complexity of information that we perceive from our environment. Mental models help us to descri e ascri e cause to and explain our surroundings.43

ur mental models help to shape the heuristics the rules-of-thum that we use to simplify and increase the speed of decision making.44 t the team level shared mental models contri ute to higher team performance.45 e are largely unaware of the mental models that we employ ut they are responsi le for many of the causal attri utions that we make for example if we meet someone who claims to like classical music we may think that person is well educated.

ecause mental models are assumptions or generalizations that are ingrained within us they can limit our openness to learning or to understanding novel situations or information in new ways. n organizations institutionalized mental models can limit the firm s a ility to take advantage of opportunities or to change or to understand when change is necessary. Furthermore organizational defensive routines can insulate the firm from examining its mental models.46 The importance of mental models to a learning organization is that when we ecome aware of the mental models that guide and limit our actions we can hold them up to the light and are in a etter position to evaluate the quality and context of our decision making. hen organizational groups ecome aware of their mental models and open them up to critical examination organizations can understand when their mental models no longer serve them successfully in a changing environment and can adapt their mental models to the changing conditions. plan- ning method that organizations can use to challenge existing mental models is scenario planning see hapter . ther methods to institutionalize the questioning and testing of mental models include practices that encourage reflective skills in employees and a culture that allows employees to challenge organizational thinking.

SHARED VISION

Senge defines shared vision as . . . the answer to the question hat do we want to create shared vision helps to connect people to a greater purpose which facilitates organizational identification and accepting the organization s goals as one s own goals. reat leaders tend to encourage a shared vision y creating pictures of the future that

are em edded in important social values. hen Steve o s shared his vision for e T in the mid- s a computer company that uilt computers intended for higher educa- tion and usiness markets his vision was to revolutionize the educational system of a

Mental models An internal representa- tion of the way things work. Mental models influence the causal attributions that we make

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Strategic Human Resources Planning NEL244

nation. 52 eople want to do work that matters and when an organization can galvanize employees around a shared vision that reflects an important social purpose it connects the individual with the other employees and with the organization in a deep and mean- ingful way.53 n terms of organizational learning a shared vision is the onding element that rings together and focuses the efforts of employees to pursue personal mastery in ways that are relevant to the goals of the firm and helps employees to understand current shared organizational mental models and develop new shared mental models.54

TEAM LEARNING

ave you ever een part of a group that made you feel as though you were performing at a higher level than you could have ever achieved on your own e experience team learning when working with a particularly good team at work in a successful group project at school or with a sports team or a group of musicians. hen experiencing team learning our individual ideas and efforts are com ined with the team s and ampli- fied y others within the team to arrive at something we could not have achieved on our own. The most important element of team learning is open dialogue where team mem ers feel free to discuss and share ideas openly and without fear of em arrassment or reproach. ialogue is important ecause it is what ena les people to see eyond their own perspective and to etter understand the oundaries of their own mental models. hen we include the views of others into our own thinking we are road- ening our understanding and incorporating systems thinking in our decision processes.

SYSTEMS THINKING

great deal of organizational thinking tends to e linear in nature we look at systems in terms of input-to-output and we analyze decisions in terms of cost- enefit. Systems thinking is a way to examine pro lems y looking at them in the context of the system in which they occur rather than as isolated issues. iagrams of systems using systems thinking tend to e circular or iterative where one part of the system influences or is influenced y another part of the system. For example a systems diagram of pouring your morning cup of coffee may look like the diagram in Figure . . The desired amount

Team learning The interaction of indi- vidual ideas and efforts toward a team objective that results in outcomes that exceed the capa- bilities of any individual on the team

Systems thinking Systems thinking views change issues within the framework of the entire organization. This view helps to under- stand the underlying causes of problems and the potential outcomes of change initiatives

Coffee level in cup

Desired amount of coffee

Angle of pour

Rate of coffee level rising in cup

FIGURE 9.6

SYSTEMS THINKING MODEL OF POURING COFFEE INTO A CUP

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NEL 245CHAPTER 9 Change Management

of coffee in your cup influences the angle at which you hold the coffee carafe which affects the rate at which your cup fills with coffee which in turn influences the coffee level in your cup. This process continues until the cup is filled to the desired level. Such a feed ack loop shows all the participating structures in the system and leads to a deep understanding of the roles of each of the structures in the system. sing systems thinking ehaviour is influenced y organizational structures such as the norms the management practices and the human capital and social capital within the firm.55 iewing organizations from a systems thinking perspective leads away from viewing

actions or ehaviours as the sources of pro lems and looks to the role of structures in influencing pro lems. Systems thinking provides a method to understand the forces that must e influenced in order for change to take place.

Senge suggests that the five disciplines are interdependent that each requires the others in order for a learning organization to e realized.56 For example vision in the a sence of systems thinking cannot lead to a rich understanding of how the vision can e implemented successfully. ithout vision personal mastery is not possi le since

individuals cannot achieve the necessary creative tension without understanding where one needs to e i.e. vision in relation to where one currently stands.

verall the five disciplines of a learning organization are vitally important to ena ling emergent change. ne principle of emergent change is that the order that governs chaos arrives through simple rules that are widely understood. n the context of a learning organization these simple rules can e represented y the organization s shared vision. Shared mental models and a shared vision ensure that the organizational structures and processes that emerge through chaordic change are in line with organi- zational needs and environmental constraints or opportunities. earning organizations permit change as a ottom-up process as well as a top-down process y essentially put- ting everyone on the same page and then allowing them to fill in the lines together. s line-level employees learn new methods to improve products or new ways to satisfy

customers learning organizations uild the structures to permit that learning to move up through the organization where those new methods ecome incorporated into the organization s practices and get implemented ack down throughout the firm. sing organizational learning firms remain in a constant state of change or adaptation y taking in new learning wherever it is experienced within the firm and diffusing through the entire organization. n this way emergent change occurs spontaneously and as needed rather than as a planned reaction to an event.

// STRATEGIC HR AND CHANGE t this point it is clear that organizational change is a dynamic and unpredicta le process. hether change is approached from a planned perspective an emergent perspective

or a com ination of perspectives several elements that are common to all models of change also overlap with the R function which provides guidance around the aspects of RM that are critical to any successful change initiative. The R function contri utes to organizational change y supporting the change process itself i.e. y helping the organization to move through each stage of change and also y managing the content of the R function to support change. n other words the content of the R function includes the recruitment selection performance management and planning activities that must e done to support the change process. hen RM is involved in the change process and develops content to support that process it is at its most proactive in terms of change readiness. hen the R function is not involved in developing the change

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Strategic Human Resources Planning NEL246

process the content of the R function to support change ecomes reactive there y diminishing the R function s a ility to support change.

hange efforts should e guided y a set of esta lished values and all change involves new learning. These two aspects are critical to change efforts and are foun- dational to the R function. Therefore the two areas of RM that are involved in strategic change include the following

. larifying and communicating the values that are central to the organiza- tion and the need for the change. hen T ank acquired anada Trust Financial Services in the main messages that were made clear were that customers would immediately experience etter service through longer anking hours and more access to automated anking machines and that

the new organization would do as much as possi le to minimize the nega- tive consequences to employees as a result of the acquisition. t is inter- esting to see that oth these values flow from T anada Trust s central value proposition that anking can e this comforta le. art of R s role at T T during this time included developing planning initiatives to mini- mize the num er of layoffs that are inevita le with an acquisition. ecause T T is a large company these plans incorporated the redeployment of employees from areas of the firm that now contained redundancies to areas that were growing y limiting new hires to allow for attrition to reduce a surplus of human capital and providing severance policies that exceeded industry standards as well as outplacement training and services. n impor- tant aspect of communicating a set of organizational values is making cer- tain that no R practices are inconsistent with the message that is eing communicated.

The R function plays a very important role in ensuring that the need for change is understood throughout the firm. onsistent with ewin s three-step model of change senior management must communicate the need to change the status quo and R plays a role in demonstrating how the new state and the process for moving to that state is consistent with the firm s values. This helps to ring a out employee uy-in to the change initiative.

. The other area of RM that is critical to implementing strategic change is training education and organizational learning. The R function is responsi le for developing each of the dimensions of organizational learning discussed earlier in this chapter. To the extent that R fosters the five dimensions of organizational learning it uilds a culture of learning within the organization. This enhances any training that occurs within the firm and it encourage employees to take a learning approach to daily tasks. The

R function must also thoroughly understand the new activities that are required to get the firm to the new state and to refreeze the new state. ased on these strategic activities R can determine the S s and competencies required to perform these activities and institute training redeployment and hiring where appropriate. rganizational change requires a great deal of new learning and when R anticipates the learning needs and has a culture in place that facilitates learning organizational change has a etter chance of success.

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// SUMMARY rganizations are complex open systems that oth influence and are influenced y their

environment. The interconnected nature of organizational structures processes practices mem ers and the changing environment renders the prediction of change outcomes a practical impossi ility the chances of unforeseen events or interactions and of unintended consequences are simply too high. t their root oth the planned and emergent approaches to change share an emphasis on the importance of learning of having a shared sense of pur- pose and of eing a le to adapt the change implementation as it progresses. s organizations move toward flatter structures more fluid jo roles and greater employee autonomy they will likely turn increasingly toward efforts to institutionalize a culture of change and incorporate elements of oth planned and emergent change into change efforts. oth the planned and emergent approaches to change can influence how organizations move toward that path.

KEY TERMS action research p. chaos theory p. dou le-loop learning p. force-field analysis p. mental model p. moving p. open system p. organizational learning p. personal mastery p. refreezing p. single-loop learning p. social network p. systems thinking p. team learning p. unfreezing p.

DISCUSSION QUESTIONS . hat are the main reasons that planned approaches to change might fail . an emergent change e intentional ow can emergent change e used to ring

a out a specific end result . hat are some of the enefits of shared mental models within organizations re

there any draw acks to widely shared mental models within firms

EXERCISES . onduct a force-field analysis of a change from an in-class course delivery format

to an online course delivery format for this course. hat is your change question hat are the main driving and restraining forces hat actions can you recommend

to strengthen the driving forces and reduce the potency of the restraining forces

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248 NELStrategic Human Resources Planning

. mergent change relies on a widely shared purpose or set of values. Think of an organization that you know well and develop a list of three or four values or aspects of that purpose. ompare your list with others in your class who chose the same organization. s there much overlap o you think this firm does well at sharing its purpose or values clearly with employees and its customers

. Think of an organization that you know well or admire. an you state that orga- nization s purpose Rather than focusing on organizational goals try to think of a purpose as something igger than the organization that is related to society in general. hat might e some of the simple guiding principles that guide emergent change at this organization

. friend of yours has just returned from a vacation and rought you a gift of a very special and valua le kind of tea. nfortunately you know nothing a out this specific tea. sing action research as a guide descri e how you would learn how to rew the perfect pot of this tea.

CASE STUDY CHANGE AT TIGER BOOTS

Tiger rand oots has een manufacturing high-quality leather oots and shoes primarily for use in the skilled trades and heavy construction work markets since

. Tiger oots are uilt tough to withstand potentially dirty and demanding working conditions and last for years. n addition to eing tough Tiger oots must e comforta le to wear and work in all day long. Tiger oots is one of only three oot shoe companies in the nited States that still performs all manufacturing

activities in the nited States. This adds the distinct enefit of a made-in- merica la el to a oot that has uilt a solid reputation as eing among the est work oots availa le. Tiger currently sells its footwear through retailers of work and safety clothing and goods as well as its own nine factory-owned retail stores and an online store within the nited States. ith factory workers corporate employees

workers in distri ution and retail employees Tiger generates roughly million in revenues yearly.

hile the cost of merican la our is much higher than the la our rates avail- a le to the majority of the oot and shoe manufacturers who use overseas manu- facturing the cost disadvantage is partly offset y the fact that Tiger oots has its own tannery. The animal hides used in the production of leather oots and shoes must e put through a lengthy treatment process efore eing dyed and then used to make oots or shoes. This ancient art is performed in tanneries of which there are only a few remaining in orth merica. ith so few tanneries in the world and the importance of high-quality leathers in the production of oots and shoes tanneries can have a strong influence on the price and quality of leathers availa le to manufacturers. Thus Tiger oots tannery is an important resource to the firm. Tiger oots are priced at the top end of the market for work oots and shoes. The average price for a pair of Tiger oots is around with a range from to roughly for the company s products whereas many of its competitors in the oot shoe industry price their products at or less. owever Tiger oots claims that many of their oots that were purchased five years ago or more are still eing worn today and that with proper care and maintenance a Tiger oot has

an indefinite lifespan. To support this claim Tiger s we site shows many of the

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249CHAPTER 9 Change Management NEL

aspects of the company s production methods which involve a high degree of highly skilled hand-crafted work and include a recrafting service. nce the sole wears out of the oots or shoes owners of Tiger rand oots can return their footwear to the company where the oot will e completely stripped down and re uilt with a new sole and refinishing the leather on the equipment used to originally produce the oot all for a modest fee around .

The market for work oots has een steady over the past years and pro- duction can e forecast relatively easily using economic indicators of growth in the construction and skilled trades industries. Tiger rand oots has a very strong rand name in these markets and its market share has remained steady at around percent. owever while percent of its production is purchased in the con-

struction and skilled trades market the other percent of production goes to the casual menswear fashion market and this trend is increasing. t seems that young men are increasingly wearing high-quality leather oots and shoes as part of current fashion trends and Tiger rand s cachet in the construction and skilled trades market gives it added value as a choice of menswear. Tiger does not have the manufacturing capacity or organizational capa ilities to adequately serve the growing casual menswear market without making changes and management is at a crossroads. ave avenport the elieves that this represents a tremendous opportunity for Tiger rand oots to create a new market and ecome a igger company. reet upta the head of operations is not so convinced she points out that in order to develop this market Tiger will need to adopt an entirely new marketing strategy deepen relationships with popular retailers like ldo and The ap to say nothing of the differences in oot and shoe design etween the con-

struction market and the casual menswear market. o uyers in the casual market really want a steel-toed dress shoe ew designers will need to e hired and the manufacturing needs of the as-yet-unknown oot and shoe designs will need to e assessed. n top of all this the cost of leather is increasing due to the increased glo al demand for leather goods. Tiger s oots are currently dou le the cost of the average uyer s oot shoe. s the cost of production continues to increase will Tiger have to price itself out of the market altogether or cut its quality to etter compete with the lower end of the market Finally expanding into this market would require hiring and training another shift of workers. iven that Tiger uses skilled workers training will take more than a month to ring a new employee to the point of eing self-sufficient on the production line.

ave has countered that this expansion would take advantage of Tiger s tan- nery which would protect Tiger from many of the effects of the increase in the price of leather. ave also elieves that these other required capa ilities can e developed quickly or that Tiger could consider producing a new economy line of oots and shoes for the casual menswear market that uses the same leathers as the premium footwear ut is glued together rather than hand-stitched and so cannot e recrafted. This line of footwear would not require the level of skilled production of the premium line ut would retain much of the Tiger look and feel that customers have come to appreciate. ecily an head of marketing ristles every time she hears this suggestion and warns that such a line of economy oots would threaten Tiger oot s value proposition and threaten Tiger s strong rand value. owever she is excited y the possi ility of expanding into a new market and the enormous opportunity that an expansion could hold for Tiger rand oots.

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250 NELStrategic Human Resources Planning

t the most recent corporate meeting senior management agreed that this expansion is worth the risk. owever they are not certain how to introduce this idea to employees or how to proceed with the change. Some of the questions and concerns even among senior management are not yet fully answered or addressed and the line employees are likely to raise many issues as well especially around the ways in which their jo s may e affected as a result of the proposed changes. lthough they are not unionized the employees are highly skilled and Tiger oots

holds its long-standing employees in very high regard.

QUESTION . ould you recommend that Tiger oots take a planned approach emer-

gent approach or lended approach to this change effort f you think the company should take a lended approach what portions of the change should e planned and what should e emergent xplain your choice of approach with a draft of your change plan.

// REFERENCES . Senge .M. et al. . The Fifth Discipline Fieldbook. ew York ou leday. . rossan M. . M. . Rouse . . Fry and . . illing. . Strategic Analysis

and Action th ed. . Toronto earson rentice all. . eer M. and . ohria. . Breaking the Code of Change. oston arvard

usiness School ress. . French . . and . . ell. . Organizational Development: Behavioral

Science and Interventions for Organizational Improvement th ed. . pper Saddle River rentice- all.

. urnes . . Managing Change: A Strategic Approach to Organizational Development and Renewal. ondon itman u lishing.

. id.

. rgyris . . Teaching Smart eople ow to earn. Harvard Business Review .

. ayes . . The Theory and Practice of Change Management rd ed. . ew York algrave MacMillan.

. eer M. and . ohria. . Breaking the Code of Change. oston arvard usiness School ress.

. otter . . . hat eaders Really o. Harvard Business Review .

. Teten aum T. . . Shifting aradigms From ewton to haos. Organizational Dynamics .

. rackhardt . and .R. anson. . nformal etworks The ompany ehind the hart. Harvard Business Review Ferris .R. et al.

. olitical Skills in rganizations. Journal of Management, .

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. id.

. ppel aum S. . . Ro erts and .T. Shapiro. . ultural Strategies in M s nvestigating Ten ase Studies. Journal of Executive Education

. . urnes . . urt ewin and the lanned pproach to hange

Re- ppraisal. Journal of Management Studies . . ickens . and . atkins. . ction Research Rethinking ewin.

Management Learning . . lausen . . . ction Research ot ust for the lassroom.

Canadian Journal of Action Research . . eaulieu R. . . ction Research Trends and ariations. Canadian

Journal of Action Research . . urnes. . . Flood R. . and .R. arson. . Dealing with Complexity: An Introduction

to the Theory and Application of Systems Science. ew York lenum ress. . ultman . . . Scaling the all of Resistance. Training and

Development . . Schein . . . The Corporate Culture Survival Guide. San Francisco

ossey- ass. . rgyris . . Teaching Smart eople ow to earn. Harvard Business

Review . . otter . . . eading hange hy Transformation fforts Fail.

Harvard Business Review . . id. . Teten aum . . Senge .M. . The uzzles and aradoxes of ow iving ompanies

reate ealth hy Single-valued jective Functions re ot uite nough. n M. eer and . ohria eds. Breaking the Code of Change

pp. . oston arvard usiness School ress. . Teten aum. . . id. . evy . . haos Theory and Strategy Theory pplication and

Managerial mplications. Strategic Management Journal . . id. . ock . . irth of haordic hange. Executive Excellence . . Teten aum. . . id. . Reynolds ngineering esign. n.d. . Boids. http www.red d.com cwr

oids. . Teten aum. . . Senge .M. . The Fifth Discipline: The Art and Practice of the Learning

Organization. ew York ou leday. . Senge. .

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. id.

. Senge. .

. id.

. Mathieu . . et al. . The nfluence of Shared Mental Models on Team rocess and erformance. Journal of Applied Psychology .

. auffroy . and . arrouillet. . euristic and nalytic rocesses in Mental Models for onditionals n ntegrative evelopmental Theory. Developmental Review .

. Smith- entsch . . . . Mathieu and . raiger. . nvestigating inear and nteractive ffects of Shared Mental Models on Safety and fficiency in a Field Setting. Journal of Applied Psychology, urtscher M. . M. ol e . acker and T. Manser. . nteractions of

Team Mental Models and Monitoring ehaviors redict Team erformance in Simulated nesthesia nductions. Journal of Experimental Psychology

. . rgyris . . Teaching Smart eople ow to earn. Harvard Business

Review . . hermack T. . and R. . Swanson. . Scenario lanning uman

Resource evelopment s Strategic earning Tool. Advances in Developing Human Resources .

. Senge. .

. shforth . . S. . arrison and . . orley. . dentification in rganizations n xamination of Four Fundamental uestions. Journal of

Management Fujita . Trope Y. i erman . and M. evin-Sagi. . onstrual evels and Self- ontrol. Journal of Personality and Social Psychology .

. onger . . . nspiring thers The anguage of eadership. Academy of Management Executive .

. ikipedia. n.d. e T. Retrieved from http en.wikipedia.org wiki e T.

. onger . . . nspiring thers The anguage of eadership. Academy of Management Executive .

. Senge. .

. id.

. lfes . . Truss and . ill. . The R Manager as hange gent vidence from the u lic Sector. Journal of Change Management

. . edford . . and S. . Mohrman. . Self- esign for igh nvolvement

arge-Scale rganizational hange. Human Relations . . Ro ertson . and R. Marranca. . T ank Financial roup Responds

to Minister of Finance ecision on cquisition of T Financial Services nc. anuary .

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Appreciate the importance of defining “downsizing” and understand why organizations may decide to downsize.

• Be familiar with issues relating to artificial intelligence and job loss. • Recognize the need to address concerns of both the victims and survivors of

downsizing. • Know the ethical issues and consequences of downsizing. • Understand what downsizing strategies are effective in enhancing

organizational performance. • Comprehend the concept of the “psychological contract.” • Develop an awareness of the importance of HRM in managing the downsizing

process.

DOWNSIZING AND RESTRUCTURING

This chapter was written by Professor Terry H. Wagar, Department of Management, Sobey School of Business,

Saint Mary’s University, Halifax, Nova Scotia.

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// THE DOWNSIZING PHENOMENON In the 1990s, organizations became obsessed with reducing the workforce and operating in a “lean and mean” fashion. This was followed by an extended period where the focus was on employee retention and winning the war for talent. However, downsizing returned with a flourish beginning around 2008 with the global financial crisis. The continuing impact of sluggish economic growth, huge debt burdens facing governments around the world, and rapid changes in technology (such as artificial intelligence and digitization) suggest that cost cutting and downsizing are unlikely to disappear in the near future.2

There is growing evidence that firms can become too “lean,” and downsizing may cut into the muscle of the organization. Furthermore, a number of the reductions have been characterized as “mean”—destroying the lives of victims of cutbacks and leaving a demoralized and frightened group of survivors of downsizing. In today’s environment, downsizing and restructuring are critical components of HR planning.

Historically, the focus of many organizations was on growth or the “bigger is better” syndrome. As a result, managers responsible for developing a downsizing strategy often had little experience in effectively managing the HR planning process and very little guidance from the management literature. Although the past 25 years have seen a considerable volume of articles on downsizing and restructuring, the suggestions they contain often are based on a single experience, are not supported by research, and frequently are in conflict. For instance, should cuts be targeted or across the board? Will the firm’s stock price increase or decrease when the firm announces a major layoff or restructuring? Should an employer carry out all of the cuts at once or stage them over a period of time? Does downsizing improve organi- zational performance?

Downsizing is not just a Canadian phenomenon. Organizations around the world are striving to improve their competitive position and respond to the challenges of a

“Loblaw Layoffs Will Affect 500 Office Workers.” “Bell Radio Confirms Local Radio and TV Layoffs.” “Up to 225 Workers to be Laid Off at St. Catharines, Ont. GM Facility.”1 No, these are not old headlines from the downsizing era of the 1990s. They are a small sample of employee cutbacks and business closures announced in 2017.

Around the globe, we are still seeing massive job cuts by both private- and public-sector employers. Consider the case of Hewlett-Packard (HP). In 2012, HP announced plans to lay off 27,000 employees. That number was increased to 50,000 in June 2014, and in October 2017, a further 5,000 employees were informed that they would

be laid off. Not surprisingly, morale has dropped, and about two-thirds of employees indicated that they would leave HP if they got another job offer. According to Professor Wayne Cascio, an expert on downsizing, cutting jobs in knowledge-based firms is particularly harmful, because “each departure disrupts the social networks where ideas are generated and work gets done.”

Sources: Adapted from Bort, J. “HP Increases Layoffs AGAIN to 55,000, and More Cuts Are Likely.” October 6, 2014. http://www.businessinsider.com; Nichols, S., “What’s HPE Next? Now it’s Unemployment for ‘Thousands’ of Staff,” www.theregister.co.uk, October 24, 2017; and Galagan, P. “The Biggest Losers: The Perils of Extreme Downsizing” T&D, 64(11).

DOWNSIZING: A THING OF THE PAST?

Survivors Employees remaining with an organization after a downsizing Downsizing strategy Strategy to improve an organization’s effi- ciency by reducing the workforce, redesigning the work, or changing the systems of the organization

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NEL 255CHAPTER 10 Downsizing and Restructuring

global economy. For example, Microsoft announced in July 2017 that it was cutting thousands of jobs, largely in its sales division. Cutbacks were expected to affect almost 10 percent of the sales workforce, with about three-quarters of the layoffs involving non-U.S. employees. According to Microsoft, “we evaluate our business on a regular basis. This can result in increased investment in some places and, from time-to-time, re-deployment in others.”3

Government policy can also have a major impact on downsizing. For instance, Britain’s exit from the European common market is expected to result in the shifting of about 10,000 financial sector jobs out of London, England.4 In Quebec, the effects of the U.S. softwood lumber dispute are being felt with Resolute Forest Products cutting shifts at seven mills and delaying the commencement of forest oper- ations (affecting almost 1,300 employees). Daniel LeBlond, Local Union President for Unifor, stated that “these families are devastated, just like if they were struck by a hurricane.”5

DEFINING DOWNSIZING AND RESTRUCTURING It is important to clarify what is meant by downsizing. Managers and academics use the word to mean a number of different activities; for a summary of words used to describe downsizing, see HR Planning Notebook 10.1. Obviously, it is difficult to understand the effect of downsizing if we do not understand clearly what it means.

Kim Cameron, a leading scholar in the area of organizational change, has defined downsizing as follows:

Downsizing is a set of activities undertaken on the part of management and designed to improve organizational efficiency, productivity, and/or competitiveness. It represents a strategy implemented by managers that affects the size of the firm’s workforce, the costs, and the work processes.6

Note that the Cameron definition is not the only one. Some definitions are much narrower or broader. For example, Datta, Guthrie, Basuil, and Pandey defined employee downsizing as “a planned set of organizational policies and practices aimed at workforce reduction with the goal of improving firm performance,” while Sheaffer, Carmeli, Steiner-Revivo, and Zionit refer to downsizing as “a selective reduction in organizational resources, including different combina- tions of reductions in physical, financial, organizational and human resources.”7

Cameron identifies three types of downsizing strategies:8

• Workforce reduction: Typically a short-term strategy aimed at cutting the number of employees through programs such as attrition, early retirement or voluntary severance packages, and layoffs or terminations. While a number of these approaches allow for a relatively quick reduction of the work- force, the problem is that their impact is often short term, and in many instances the organization loses valuable human resources.

Laying off employees is a quick, but temporary, option for work- force reduction.

P PH

O TO

/N at

ha n

D en

et te

Downsizing Activities undertaken to improve organizational efficiency, productivity, and/or competitiveness that affect the size of the firm’s workforce, its costs, and its work processes Workforce reduction A short-term strategy to cut the number of employees through attrition, early retirement or voluntary severance packages, and layoffs or terminations

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Strategic Human Resources Planning NEL256

• Work redesign: Often a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products, and/or services should be changed or eliminated. This strategy, which is frequently combined with workforce reduction, includes things such as the elimination of functions, groups, or divisions; the reduction of bureaucracy; and the redesign of the tasks that employees perform. Because some planning is required, this strategy takes somewhat longer to implement and gets away from the problem of the organization simply doing what it always has done but with fewer people.

• Systematic change: A long-term strategy characterized by changing the orga- nization’s culture and the attitudes and values of employees with the ongoing goal of reducing costs and enhancing quality. By its very nature, this strategy takes considerable time to implement. The thrust of the strategy is to consider downsizing as an evolutionary part of an organization’s life with the goal of continuous improvement: Employees assume responsibility for cutting costs and searching for improved methods and practices. Because of the human and financial commitment required for strategy, the impact on the organization’s bottom line is rarely immediate, and consequently the approach is less than appealing to firms that focus on short-term profits or budget goals.9

Although some downsizing efforts were limited to reducing the size of the work- force, many employers discovered that merely cutting back the number of people in the organization was insufficient to achieve organizational goals. Consequently, some firms began giving more attention to “restructuring” the workplace.

HR PLANNING NOTEBOOK 10.1

EXAMPLES OF WORDS USED TO DESCRIBE DOWNSIZING

axed building down chopped compressed consolidated declining degrown dehired demassed derecruitment destaffed disemployed dismantled displaced downshifted downsized fired involuntarily separated personnel surplus reduction ratcheted down rationalized reallocated rebalanced redeployed redesigned reduction-in-force redundancy elimination re-engineered reorganized reshaped resized resource allocation restructured retrenched RIF’d rightsized slimmed slivered streamlined workforce imbalance correction

Sources: Various, including K. Cameron, “Strategies for Successful Organizational Downsizing,” Human Resource Management, Vol. 33 (1994): 189–211; M. Moore, Downsize This (New York: Harper Perennial, 1996); L. Ryan and K. Macky, “Downsizing Organizations: Uses, Outcomes and Strategies,” Asia Pacific Journal of Human Resources, Vol. 36 (1998): 29–45; and C. Tsai and Y. Yen, “A Model to Explore the Mystery Between Organizations’ Downsizing Strategy and Firm Performance,” Journal of Organizational Change Management, Vol. 21 (2008): 367–384.

Systematic change A long-term strategy that changes the organization’s culture and attitudes, and employees’ values, with the goals of reducing costs and enhancing quality

Work redesign A medium-term strategy in which organizations focus on work pro- cesses and assess whether specific func- tions, products, and/ or services should be eliminated

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There are three types of “restructuring”: (1) portfolio restructuring, which involves changes to the organization’s business portfolio (changes in the mix and/or percentage makeup of the organization’s businesses, including divestures and acquisitions); (2) financial restructuring, which may include financial changes such as reducing cash flow or increasing levels of debt; and (3) organizational restructuring, which is “any major reconfiguration of internal administrative structure that is associated with an intentional management change program.”10 While portfolio and financial restructuring are important, the emphasis in this chapter will be on organizational restructuring. It is necessary, when considering downsizing, to distinguish an approach involving a reduction in the number of employees with one based on a strategically-oriented organizational redesign or restructuring.11

In order to provide more information on the extent to which employers are restruc- turing the workplace and introducing organizational change, the results of two surveys conducted in 2007 were merged; the findings are shown in Figure 10.1. Overall, about 32 percent of Canadian organizations were involved in an extensive restructuring pro- gram. The most common activities included redesigning jobs, eliminating unnecessary tasks, and contracting out. However, there is considerable variation across organizations with respect to restructuring and change efforts.

WHY DO ORGANIZATIONS DOWNSIZE? There are several reasons organizations decide to downsize the workforce. Some of the factors most commonly mentioned are as follows:

• Declining profit • Business downturn or increased pressure from competitors • Merging with another organization, resulting in duplication of efforts • Introduction of new technology • The need to reduce operating costs

2.96

3.24

2.47

2.45

2.55

2.97

2.24

3.51

2.43

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6

Eliminating tasks

Redesigning jobs

Reducing labour costs

Increasing outsourcing

Cutting investment

Contracting out

Across-the-board cuts

Workplace restructuring

Use of part-time employees

6-point scale (0 = none; 6 = a lot)

FIGURE 10.1

RESTRUCTURING AND ORGANIZATIONAL CHANGE

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Strategic Human Resources Planning NEL258

• The desire to decrease levels of management • Getting rid of employee “deadwood”

Simply put, many organizations engage in downsizing because managers perceive that cutting people will result in reduced costs (costs being more predictable than future revenues) and improved financial performance. In addition, labour costs are often seen as easier to adjust relative to other expenditures (such as capital investment). Still, there is considerable evidence that workforce reduction programs often fail to meet their objectives, as has been observed by Pfeffer:

Layoffs don’t even reliably cut costs. When a layoff is announced, several things happen. First people head for the door—and it is often the best people (who haven’t been laid off ) who are the most capable of finding alternative work. Second, companies often lose people they don’t want to lose. Managers also underestimate the extent to which layoffs reduce morale and increase fear in the workplace.12

Some organizations drastically reduce the workforce and employ a severe reduction strategy despite stable or increasing demand and a favourable competitive environ- ment.13 This development, which has been mentioned by HR managers in personal interviews, may be due to a variety of reasons including a decision to follow the lead of other firms engaging in cutback management and an increasing desire to operate in a “lean and mean” fashion. At other times, the decision to lay people off or close a business may be unavoidable:

Kellys Luggage, which began operating in Halifax as a harness maker in the late 1800s, shut its doors at the end of 2014. Kellys was believed to be North America’s oldest luggage and leather shop. In addition to increasing competition from the big-box stores and online retailers, vice-president Brian Hobrecker also noted that “younger shoppers have different tastes and shopping habits. We’ve seen our sales erode over the last 12 years, at least. It’s been challenging.14

Santana, Valle, and Galan argue that while organizations frequently resort to layoffs and terminations during a period of decline, it is important to consider the underlying causes or sources of the decline. For employers experiencing “firm-based decline” (due to factors such as financial performance, governance issues, and HR policies and invest- ment), a “flexibility-oriented” human resource strategy is preferable.

However, if the decline is attributable to “industry contraction-based decline” (such as economic, technological, legal, social and competition changes), a more “efficiency- oriented” human resource strategy is recommended. If an employer is experiencing both types of decline, a “niche-oriented” human resource strategy is desirable.15

THE DOWNSIZING DECISION AND THE SEARS CLOSURE Going through a downsizing can be a very painful and difficult experience. However, some senior executives believe that reducing the workforce is just part of the job. One executive, when discussing his role in a cost-cutting plan at a previous company, stated, “I don’t get frustrated anymore. I just fire people.”16

Too often, organizations embark on a downsizing program without careful consideration of whether there are feasible alternatives to downsizing. Study after study reveals that many downsizings are not well planned, frequently ignore the linkage between downsizing and the strategic direction of the organization, and underestimate the impact of downsizing on the

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NEL 259CHAPTER 10 Downsizing and Restructuring

organization and its human resources. Proactive organizations plan for downsizing by careful planning. Examining the closure of the legendary retailer Sears is particularly instructive.

In June 2017, Sears (once the largest and most successful department store in the country) announced that it would close 59 of its 255 stores and lay off about 2,900 employees (17 percent of the workforce). In early July, the company announced that it would not pay severance pay to laid-off workers, some of whom had worked for the company for more than 40 years.17

Employees were angered even more when they heard that the company was planning to pay $9.2 million in bonuses to keep executives and staff members employed as the company went through restructuring. According to Marinella Gonzalez, who worked as a planner at Sears’ head office for 18 years but will not get severance, “This situation happened because of mismanagement, and it should not be the workers that have to pay for that. I think our government needs to step in.”18

About four months later, Sears was given court approval to liquidate all of its remaining stores in Canada. The last 20 years at Sears was characterized by mismanage- ment of online retailing, a failure to effectively position its brand, and board of director decisions aimed at treating the stores as a cash cow and failing to invest capital back into the business. Since 2005, more than $2.9 billion was paid out in dividends while the amount invested in the company dropped from $86 million in 2007 to under $27 million the past year. David Tawil, President of Maglan Capital stated “it’s been neglect—massive amounts of neglect” and marketing executive Arthur Fleischmann reported, “They were the original e-commerce company. They could have been Amazon, but they failed to stay relevant in their product offering.”19

A recent article by Sarah Dobson20 identified some key learning points from the Sears experience. While retention bonuses are common during major restructuring or company sale, the optics at Sears were terrible and there was minimal communication to employees explaining the rationale behind such bonuses. In addition, the decision to not pay severance to employees resulted in a public relations nightmare. As one expert said, “There’s such a disparity between the two actions. People say there is money, you’re just not choosing to allocate it to these other people.”

Although Sears ultimately established a $500,000 hard- ship fund, it was viewed as crumbs on the table and in no way represented fair severance. One expert said it was like having employees “beg for their supper” and the amount of the fund paled in comparison to the $70 million employee trust fund set up by Target Canada, which had been in Canada for less than three years when it closed down. Several experts emphasized the importance of communication during the restructuring process and it appears that Sears was woefully inadequate in providing clear and consistent messages to its workforce.

ALTERNATIVES TO DOWNSIZING Downsizing can be a costly strategy for organizations to pursue, and, as a result, it is desirable to investigate whether alternatives to downsizing exist. In a number of instances, organizations discover that pursuing different alternatives to downsizing may eliminate the need to reduce the workforce or allow for a less severe downsizing strategy. Different approaches are summarized in HR Planning Notebook 10.2.

Sears closure provides insight into managing the downsizing process.

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HR PLANNING NOTEBOOK 10.2

ALTERNATIVES TO EMPLOYEE CUTBACKS: SOME HR STRATEGIES

Several alternatives are available to organizations faced with the challenge of cutting costs. These include

Medium-Term Cost Adjustments

• Extending reductions in salary

• Voluntary sabbaticals

• Lending employees

• Exit incentives

Short-Term Cost Adjustments

• Hiring freeze

• Mandatory vacation

• Reducing the workweek

• Reducing overtime

• Reducing salaries

• Short-term facility shutdowns

• Obtaining cost-reduction ideas from employees

Sources: Adapted from F. Gandolfi, “HR Strategies That Can Take the Sting Out of Downsizing-Related Layoffs,” Ivey Business Journal Online, July/August, 2008. Also see W. Martin and A. Davis, “Alternatives to Downsizing: An Organizational Innovation Approach,” International Journal of Business and Social Research, July 2013, pp. 19–27.

// THE FUTURE OF WORK Jobs are being dramatically altered due to several factors such as artificial intelligence and computerization. A number of recent reports suggest that the current view of work will be changed markedly and a number of occupations are at risk of being eliminated due to technological advancements.

ARTIFICIAL INTELLIGENCE AND JOB LOSS Senior Deputy Governor of the Bank of Canada Carolyn Wilkins asserted that while technological progress should lead to increased productivity in countries such as Canada, job losses and greater income equality are also likely. According to Wilkins, “Blaming the machines is not the way forward. Innovation is always a process of creative destruction, with some jobs being destroyed and, over time, even more jobs being created.”21

An often-quoted 2013 study by Oxford University researchers Frey and Osborne involved the examination of several hundred occupations. The authors concluded that about 47 percent of total U.S. employment is at risk of being replaced by computeriza- tion. However, the probability of computerization was negatively associated with both wages and educational attainment.22

Similarly, a 2016 report by the Brookfield Institute for Innovation + Entrepreneur- ship suggested that about 42 percent of Canadian jobs are at risk of being lost due to automation, while the Organisation for Economic Co-operation and Development’s projection was 38 percent and the C.D. Howe’s estimate was 35 percent.23 According to the Brookfield Institute report, the five occupations most at risk (as measured by the number of people employed) were retail salesperson, administrative assistant, food

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NEL 261CHAPTER 10 Downsizing and Restructuring

counter attendant, cashier, and transport truck driver. Sean Mullin, Executive Director of the Brookfield Institute, stated that “we don’t believe all of these jobs will be lost. Many will be restructured, and new jobs will be created as the nature of occupations change due to the impact of technology and computerization.” Jobs with a lower risk of disappearing include those in management, teaching, science, technology, engineering and math.24

According to futurist Martin Ford, highly routine jobs like telemarketing and tax preparation have about a 99 percent chance of being automated, while food prepa- ration jobs in the fast-food industry have about an 80 percent probability of being replaced by robots (such as Flippy which is already being employed at CaliBurger restaurants).25

New technologies, such as the self-scanner, are radically changing the retail sector at bricks and mortar locations. In Fall 2017, Walmart introduced the self-scanner in 22 Canadian stores; customers carry the scanners with them while they shop and just stop by the checkout to pay. While Walmart states that its objective is not to reduce employment, it is expected that close to 1 million retail sales and cashier jobs will be lost to automation over the next 10 to 20 years.26

A recent report, The Intelligence Revolution: Future- Proofing Canada’s Workforce, noted a number of major forces of change including (1) robotic process automation, (2) artificial intelligence, and (3) human enhancement tech- nologies such as devices and wearables aimed at overcoming limitations or improving human capabilities.27 The report also identified five important factors resulting from the intelligence resolution. These factors are presented in HR Planning Notebook 10.3.

How will artificial intelligence and robotics change the future of work?

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HR PLANNING NOTEBOOK 10.3

FACTORS DISTINGUISHING THE INTELLIGENCE REVOLUTION

Several factors have been identified as shaping the future of work:

• The concept of a job has been fundamentally changed—traditional notions of work are often not applicable in the world of work that is emerging.

• Machines are learning faster than humans— machines now have the capability to learn and upgrade their skills and capabilities.

• New opportunities for people and machines are emerging as technologies converge—artificial

intelligence, motion sensors, and advanced cameras are being integrated.

• Impact of technological change will result in wide and deep disruption—for instance, even fields such as law and medicine (which have histori- cally been largely unaffected by automation) are being changed dramatically.

• New workforce is emerging—a growing number of employees are freelancers or consultants who are employed for a specific project and then move on to another job with a different employer.

Source: Adapted from The Intelligence Revolution: Future-proofing Canada’s Workforce. 2017. Deloitte and Human Resources Professional Association of Canada.

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THE AMAZON EFFECT The retail sector is being revolutionized by what has become known as the “Amazon effect.” To give an example of how jobs are changing, consider a warehouse worker at Amazon whose previous job was to stack small bins weighing up to 11 kilograms during a 10-hour shift. Now the worker is employed by the company to monitor several robots in the warehouse and troubleshoot when problems arise; the objective of using robotics was to avoid people having to perform monotonous tasks and to reduce the amount of walking around by employees, leaving workers to do jobs that engage them mentally.28

Also consider the massive changes within the grocery industry. In 2009, Sobeys made the strategic move to replace employees with robots, and currently operates with four robotic distribution centres. According to Eric Seguin, senior vice-president of Distribu- tion and Logistics for Sobeys, “One robot does the work of four employees. The robots don’t get tired. They always show up in the morning after the Stanley Cup final.”29

// INPLACEMENT AND OUTPLACEMENT ISSUES In examining the downsizing decision, it is necessary to consider both inplacement and outplacement issues.30 Inplacement refers to a career management approach aimed at reabsorbing excess or inappropriately placed workers into a restructured organization, while outplacement focuses on the provision of a program of counselling and job search assistance for workers who have been terminated.

In a survey of Canadian manufacturing firms, organizations that had gone through downsizing were asked to report on the benefits they provided to displaced workers. These results are provided in Figure 10.2. The most common benefits were severance

Inplacement Reabsorbing excess or inappropriately placed workers into a restructured organization Outplacement Providing a program of counselling and job search assistance for workers who have been terminated

FIGURE 10.2

BENEFITS TO DISPLACED WORKERS

0 10 20 4030 50 60 70 9080

Job referral service

Retraining assistance

Family counselling

Job search support

Extended notice

Outplacement counselling

Benefits continuation

Severance pay

% of Employers providing benefits

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NEL 263CHAPTER 10 Downsizing and Restructuring

pay, continuation of employee benefits, outplacement counselling, and an extended notice period. A minority of firms provided retraining assistance or family counselling.

We are also seeing innovative approaches to assisting workers who have suffered job loss:

As a result of the phasing out of coal-fired electricity, the NDP government in Alberta has launched the Coal Workforce Transition Fund to assist laid-off workers. A major objective of the fund is to supplement employment insurance and assist employees in the coal industry as they transition into new jobs or retirement. The province’s Department of Labour will also provide additional support for laid-off workers in the form of training, education and career counselling.31

SOME ETHICAL CONSIDERATIONS Consider the experience of one female manager who was downsized.

I actually did the rounds and said goodbye to a few key people. And the thing that was really upsetting was that I went in to see senior people such as the chief executive officer; I went into his office and he just came out and saw me talking to his secretary and said, “What is wrong?” Because he saw my face. And I said “I’ve just been retrenched.” And he was shocked because he didn’t know, because it was his second in command who handled operational issues. So he basically said “I’m really sorry” . . . but you know, “See you later. There’s nothing I can do.”32

Is it unethical to downsize? Downsizing is, in most circumstances, perfectly legal. Of course, there may be contractual provisions (such as terms of a collective agreement) and legal restrictions (such as human rights legislation, labour or employment standards, or the common law of wrongful dismissal) that restrict how an employer may engage in downsizing. For example, labour standards codes often require that an employer provide a specified period of notice before engaging in a mass layoff.

Assuming that a downsizing is legal, can it still be unethical? There is evidence that downsizing may have negative impacts on laid-off employees, survivor employees, and the downsizers. When confronted with the need to make decisions about downsizing, managers may use economic, accounting, and ethically based rationales.33

A number of downsizings may infringe on principles of distributive, procedural, and interactional justice (see “Perceptions of Justice” later in this chapter). Moreover, com- munication during a downsizing may be mismanaged, and managers may use and abuse information as a source of power. For instance, organizations may choose to conceal information from employees (such as failing to inform employees about impending job loss) or distort information concerning the financial status of the business.34

What about ethical decisions by employees facing job insecurity? One study found that job insecurity may lead to emotional exhaustion, which impairs the ability of some employees to self-regulate, resulting in unethical behaviour. While highly adaptable employees frequently have the skills and abilities to cope with job insecurity, employees who face challenges adapting to major change are more likely to engage in unethical behaviour at the workplace.35

Downsizing may be considered a breach of the psychological contract that exists between an employer and an employee (i.e., an individual worker’s perception of the agreement he or she has with the employer). In addition, downsizing may also involve the violation of social contracts; an organization is a member of different local communities, and a failure to adhere to certain values and mores (an ethical floor or

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Strategic Human Resources Planning NEL264

basic standards of ethics) would result in the organization being considered a “poor” corporate citizen.

One employee, after being informed by his boss that his employment with the company had been terminated, stated the following:

As I say, the relationship between my boss and myself was pretty intense, and I think (the meeting) ends up with something like him saying, “Well Ben, this is very unfortunate. I do wish you all the very best in your future and hope everything will work out,” something to that effect. And I responded with, “Look Chris, let’s not mess around. You hate my guts, and I can assure you that I hate yours.”36

PLANNING FOR DOWNSIZING Assuming the organization has decided to embark on a downsizing strategy, planning is essential. Some key issues include the following:

• Determining how many people will lose their jobs. • Determining who will be let go. For example, will the decision be made on the

basis of seniority, performance, or potential? • Determining how the reduction will be carried out. For example, to what

extent will the organization use attrition, early retirement or voluntary sev- erance programs, and layoffs or termination? The approaches to workforce reduction vary in terms of the degree of protection to employees and the time it takes to implement them.

• Determining the legal consequences. For example, organizations often ignore or are unaware of legal requirements when downsizing the workforce. Some areas of law to consider include the law of wrongful dismissal, employment standards legislation, trade union law, existing collective agreement provisions, and human rights legislation.

• Designing current and future work plans. This issue represents a key challenge for the organization and is frequently neglected.

• Implementing the decision. Implementation includes elements such as the communication of the termination decision, the timing of the decision, security issues, severance payments, outplacement counselling, and communications with remaining employees.

• Performing follow-up evaluation and assessment of the downsizing efforts. Although this step is critical, it is often ignored in many organizations.37

ADJUSTING TO JOB LOSS Workers who have lost their job frequently experience tremendous pain. As well, job loss can be very difficult for family members. Furthermore, many downsized employees are very bitter and angry with their former employer. A U.S. study of downsized workers revealed that 67 percent would never work for their former company again, 54 percent would not recommend that others purchase the organization’s products or services, and 11 percent considered going to the media and talking about their layoff experi- ences.38 As indicated in HR Planning Today 10.1, losing a job may have benefits for some employees.

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NEL 265CHAPTER 10 Downsizing and Restructuring

Still, for most employees, job loss is a traumatic experience. Consider the responses from two victims of downsizing:39

Victim 1: Money was limited. I felt very un— . . . I didn’t like to go out in the day. I remember my wife said to me, “Why don’t you go and mow the lawn?” And I didn’t want to go out there because, it’s interesting, you just felt that people are watching you. And you have this feeling of, “He can’t even support his family.” Look at him. He is failing.

Victim 2: I was out of work for seven months. I was trying very hard to get a job. That did have a dramatic effect on me and my family. My kids were going to private school. I’d paid a whole year up front. But it affected them. My kids said at one point, and this really cut me up, they said “Daddy, if we haven’t got any money, we don’t have to have Christmas this year.” And that really upset me.

HR PLANNING TODAY 10.1

CAN LOSING A JOB BE A GOOD THING?

While job loss is not typically considered a favourable expe- rience, a study of 30 men and women who lost their job and were using an outplacement firm revealed that losing a job may have some positive aspects. Some of the benefits resulting from job loss identified by participants were

• The opportunity to reflect on their careers and a chance to think about what they really want to do.

• A chance to get out of a job they didn’t like. A number of the participants, upon reflection,

concluded that they weren’t satisfied with what they had been doing.

• More time for family and a better work-life balance.

Although some participants felt considerable stress and anxiety associated with job loss, others felt relief. More positive views tended to occur as time passed. Still, individuals with young families felt considerable pressure to get back into the workforce.

Source: Adapted from S. Klie, “The Upside of Job Loss,” Canadian HR Reporter, October 22, 2007, 1–2.

If a single organization acting alone decides to engage in workforce cutbacks, the employees have the option of seeking alternative employment; however, in an economy in which several firms are downsizing, frustrated employees have few alternative employ- ment opportunities.40 Still, firms that have not treated employees well may encounter difficulties in attracting and keeping quality employees when the demand for workers is high. A poll of almost 7000 employees indicated that 84 percent would search for a new job if they heard that their company was planning layoffs.41

A number of organizational interventions and practices have been identified as helping previously employed workers adjust to job loss and secure new employment.42 They include the following:

• Advance notification of layoffs, which gives employees time to deal with the reality of job loss and seek future employment

• Severance pay and extended benefits, which provide an economic safety net • Education and retraining programs, which give individuals time to acquire

marketable skills

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• Outplacement assistance to inform employees of new job opportunities and to improve their ability to “market” themselves

• Clear, direct, and empathetic announcement of layoff decisions • Consideration of HR planning practices that represent alternatives to

large-scale layoffs

Still, organizations don’t always manage the process properly. As one employee observed:

You know, they [former employees] were told that their positions were being elimi- nated, they were given counselling—financial and counselling about their package . . . but then they were actually ushered right out the door and I think that is despicable. People that had been with the company for 20 years that had been very good employees are made to think that they’ve done something wrong . . . very, very demeaning.43

There is growing evidence that many individuals are staying out of the workforce. The labour force participation rate, which is slightly under 66 percent,44 is the lowest it has been in the past decade and there is particular concern about the threat of unstable jobs. According to McMaster University professor Wayne Lewchuk: “It’s a brutal world out there if you’re a firm. . . . So we’ve seen a movement of firms to protect a core of employees and surrounding that with a periphery of less permanent employees or tasks that are contracted out.”45 HR Planning Today 10.2 summarizes research examining employment status and suicide risk.

// THE “SURVIVORS” OF DOWNSIZING While we see media accounts of people rebounding from downsizing and starting a new life for themselves, the reality is that for many individuals, the pain of being downsized is very severe. The impact on family life, career plans, and personal esteem are devastating and the social costs can be enormous.

HR PLANNING TODAY 10.2

EXAMINING EMPLOYMENT STATUS AND SUICIDE RISK

Is losing a job associated with a greater risk of suicide? What about being unemployed for a long period of time? Tim Classen and Richard Dunn examine these questions using U.S. panel data over a 10-year period. Their major findings include the following:

• Recent job loss (unemployed less than five weeks) was not associated with a difference in suicide risk in men versus women.

Source: Adapted from T. Classen and R. Dunn, “The Effect of Job Loss and Unemployment Duration on Suicide Risk in the United States: A New Look Using Mass-Layoffs and Unemployment Duration,” Health Economics, Vol. 21 (March 2012): 338–350.

• A narrower measure of recent job loss (based on mass-layoff events) was positively associated with the suicide rate for both men and women. The authors estimate one additional suicide for every 4,200 men who became unemployed as part of a mass layoff and one additional suicide for every 7,100 women who were part of a mass layoff.

• Suicide risk increases for both men and women who experience long periods of unemployment.

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What about the survivors of a downsizing? How do employees who remain with an organization react? Here is a description of a typical response, also known as survivor syndrome:46

The initial anger and pain are often followed by fear and cynicism. Stress, bred of uncertainty and the necessity of doing more with less, skyrockets. Trust in the company and its management plummets. Employees who remain spend their days juggling more work and avoiding anything that approaches risk taking or innovation.

Surviving a downsizing can be traumatic and there is growing evidence that percep- tions of job insecurity (even in the absence of a downsizing) may be associated with negative consequences for employees and employers (see HR Planning Today 10.3). Job insecurity has been defined as “an individual’s expectations about continuity in a job situation” or “overall concern about the future existence of a job.”47 In other words, even employees in organizations that have not downsized the workforce may have perceptions of job insecurity, which has been related to impaired well-being, increased stress, higher levels of burnout, mental distress, and lower work and supervisor satisfaction.48

HR PLANNING TODAY 10.3

ORGANIZATIONAL DOWNSIZING AND ALCOHOL USE

It is readily acknowledged that surviving a downsizing is associated with a stressful work environment. However, are survivors more likely to use alcohol? Recently, Michael Frone explored this issue using data from almost 2,300 U.S. workers. Among the most important findings were the following:

• Being exposed to a downsizing was associated with increased frequency of drinking alcohol, number of drinks consumed per drinking occasion,

and both binge drinking and drinking to the point of intoxication.

• Excessive alcohol use following a downsizing was significantly associated with younger downsizing survivors (40 years of age or younger) but the relationship between downsizing and alcohol use was not statistically significant for workers over 40 years of age.

Source: Adapted from M. Frone, “Organizational Downsizing and Alcohol Use: A National Study of U.S. Workers During the Great Recession,” Addictive Behaviors, Vol. 77 (February 2018): 107–113.

PERCEPTIONS OF JUSTICE Perceptions of fairness and equity play a key role in understanding how survivors of a downsizing react to the experience. In examining the survivors of downsizing, three types of justice warrant consideration:49

• Procedural justice: The procedures (or “decision rules”) used to determine which employees will leave or remain with the organization.

• Interactional justice: The type of interpersonal treatment employees receive during the implementation of the downsizing decision.

• Distributive justice: The fairness of the downsizing decision. For example, responses from employees may include feelings of guilt after seeing co-workers lose their jobs, support for the downsizing decision as necessary for the firm, or feelings of unfairness and concern that further layoffs may put their own job in jeopardy.

Distributive justice The fairness of the downsizing decision

Procedural justice Procedures or rules used to determine which employees will be downsized Interactional justice The interpersonal treatment employees receive during the implementation of the downsizing decision

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Consider the response of one disgruntled employee who was laid off from a chemical company and sabotaged the computer system, resulting in more than $20 million in damages. In a letter to the company president, he wrote:

I have been loyal to the company in good and bad times for 30 years. I was expecting a member of top management to come down from his ivory tower to face us with the layoff announcement, rather than sending the kitchen supervisor with guards to escort us off the premises like criminals. You will pay for your senseless behaviour.50

HR Planning Today 10.4 addresses the issue of fairness and commitment to the organization after downsizing.

SURVIVOR REACTIONS There is considerable evidence that downsizing may produce a number of dysfunctional behaviours among the employees who remain with the organization. Some of these impacts are discussed below:51

• Negative attitudes and behaviours: In a number of downsizings, employees who retain their jobs report increased job insecurity, fear, stress, and burnout. They may also experience lower self-confidence and self-esteem, reduced job satisfac- tion, and lower commitment to the organization. Not surprisingly, these fac- tors may lead to increased turnover, absenteeism, and lateness.

• Reduced performance capabilities: There is growing evidence that it is not neces- sarily the poor performers who leave the downsized organization. Of particular concern is the fear that the best employees will leave, because quality workers are more attractive to other firms. This result undermines the HR activities of the organization.

• Lower organizational productivity: Negative employee attitudes and behaviour, in conjunction with lower performance capabilities, may destroy or markedly harm team activities and result in lower productivity (see HR Planning Today 10.4).

HR PLANNING TODAY 10.4

FAIRNESS AND COMMITMENT AFTER DOWNSIZING

What is the relationship between downsizing and affec- tive organizational commitment (the level of emotional attachment to, identification with, and involvement in the organization)? Do the perceptions of survivors and victims differ? The results of a recent study indicate that

• Fairness was correlated with higher organizational commitment when considering the responses of both survivors and victims of downsizing.

• Procedural fairness was more important than dis- tributive fairness for downsizing survivors.

• The impact of fairness is greater in countries with a more individualistic culture (rather than a col- lectivistic culture).

• Fairness is more important if the downsizing was undertaken in order to maximize profits rather than out of economic necessity.

Source: D. van Dierendonck and G. Jacobs, “Survivors and Victims, a Meta-analytical Review of Fairness and Organizational Commitment After Downsizing,” British Journal of Management, 2010: 96–109.

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One study examined various forms of downsizing and the perceptions of almost 14,000 employees. The major findings included the following:

• Survivors of layoffs reported lower perceived organizational performance, lower job security, reduced attachment to the organization, and a higher intention to quit their job compared with employees who had not experienced downsizing.

• Survivors of offshoring (moving work to foreign entities outside the company) perceived that their employer’s organizational performance was lower, man- ager fairness was lower, and commitment to the organization was not as high compared to respondents who had not been downsized. However, survivors of outsourcing (moving work to outside entities such as contractors or consul- tants, resulting in job loss) did not differ significantly in their attitudes relative to employees who had not been downsized.52

IMPACT ON THE “DOWNSIZERS” Although there has been a fair bit of research on the survivors of downsizing, what about the individuals who carry out the downsizing and actually terminate members of the workforce? In one study, detailed interviews were conducted with 10 managers responsible for implementing the downsizing. The results showed that participating in the downsizing process was very difficult for a number of managers. Of particular note was the experience of social and organizational isolation, a decline in personal health and well-being, and an increase in family-related problems.53 Another study revealed that having to carry out the downsizing (being the “executioner”) is emotionally taxing and the downsizers develop mechanisms to distance themselves emotionally, physically, and cognitively from the task. Experienced downsizers were more able to develop coping mechanisms and an emotional numbness to the task.54 Downsizers may begin speaking in less personal terms to describe their job—for instance, a workforce reduction may be described as a realignment or “revectoring.”

While the involvement of some downsizers may be restricted to behind-the-scenes administrative tasks (such as blocking employee access to computers), others have a more direct role including identifying the people to be laid off, carrying out the actual layoffs, and dealing with employees immediately after the layoff decision:

People stare at you funny, they won’t even say “Hello” to you. You know, they think you made the personal decision yourself. … What was my name for it? A grim reaper.55

There is often extreme emotion on the part of the downsizer:

A manager I dealt with here, broke down and cried. Cried during the training sessions. Got too emotional herself. Cried during the delivery of the message. I felt that the person did not display the managerial or directorial responsibilities that they have to the company. Got too emotional and too personal.56

// FINANCIAL PERFORMANCE AND DOWNSIZING Do organizations that have reduced their workforces perform better than other firms? This is an important question. Organizations engaging in downsizing anticipate that their financial performance will thereby improve.

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How does the stock market react to downsizing announcements? While some analysts suggest that downsizing will improve the value of a firm’s stock, investors generally respond negatively to the announcement of a layoff, particularly if the reduction is due to financial factors or involves a large-scale, permanent cutback of employees.

One study indicated that downsizing had a negative impact on stock market returns, and this was even more pronounced for larger downsizings. However, the negative effects associated with downsizing were reduced or eliminated when the firm adopted a strategy in which specific units and functions were targeted for layoffs; targeted cuts allow the firm to retain the most valuable human resources, whereas across-the-board cutbacks result in the loss of quality employees. If engaging in a large downsizing is inevitable, firms with disengagement incentives/strategies (incentives to leave) are viewed more favourably by the stock market relative to firms without such incentives/strategies.57 Another study revealed that the decision to use a press release to announce a downsizing was associated with more negative reactions by investors.58

When we look at financial performance outcomes, academic research does not paint a very clear picture; some studies suggest downsizing is linked to increased profitability while others indicate it is linked to poorer financial performance. Why the conflicting results? In examining the various studies, it is difficult to make comparisons, because authors don’t use similar measures of performance, and each defines downsizing some- what differently. In addition, the research tends to look at workforce reduction behaviour without considering the overall downsizing strategy.

However, there is some U.S. evidence supporting the position that improved return on assets and common stock might be related, at least in part, to the downsizing strategy employed by the organization.59 Firms following a “pure employment” downsizing (a workforce cutback of at least 5 percent but little change in plant and equipment expenditure) did not outperform other firms in their industry. However, “asset down- sizers” (firms that cut at least 5 percent of the workforce accompanied by a decline of at least 5 percent in expenditures on plant and equipment) generated higher returns relative to industry competitors.

In addition, a study of Fortune 500 companies revealed that firms that had down- sized their workforce had substantially poorer financial results up to two years later. However, these results began to dissipate by the third year. The findings were particularly negative for employers reducing 10 percent or more of the workforce. In addition, there was modest evidence that the use of more frequent (ongoing) layoffs was associated with poorer performance.60

It appears that the link between organizational performance and downsizing is complex, and that the likelihood of a successful downsizing might be associated with a number of factors surrounding the downsizing. A study of large firms over an 18-year period indicated that downsizing is more likely to be successful (as measured by better financial performance) when firms have higher levels of slack (excess resources, which can include inventory, working capital, and people), the downsizing is broadly based (i.e., the focus not only is on reducing the number of people but also involves orga- nizational redesign), and the approach to downsizing is proactive (planned out rather than in response to declining performance).61 In addition, financial performance may also vary depending on whether the rationale for the downsizing was excused-based or justification-based.62 These findings support a number of suggestions provided earlier in the chapter.63

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CONSEQUENCES OF DOWNSIZING Many downsizing efforts fall well short of meeting organizational objectives, and are carried out with little strategic planning or consideration of the costs to the individuals and the employer.64 More often, job cuts represent a short-term reaction to a much more complex problem. While senior executives often focus on financial issues during a reorganization, the benefits of restructuring frequently fail to transpire if HR issues are not carefully thought out and resolved appropriately.

HR PLANNING TODAY 10.5

ARE EMPLOYEES IN A DOWNSIZED ORGANIZATION MORE LIKELY TO QUIT?

What are the implications for employee quit behaviour if an organization downsizes? Does investment in human resources management practices moderate the quit rate? These questions were addressed in a study by Trevor and Nyberg. Among their major findings were the following:

• Downsizing was associated with a higher quit rate. This finding has implications for an organization that may lose more people than desired, because the downsizing in turn impacts on the quit rate. As well, higher performers may be among those who decide to voluntarily leave the organization.

• Higher quits are frequently associated with nega- tive consequences, compounding the negative

effect of the downsizing. The authors found that if just 1 percent of the workforce is downsized, post-downsizing voluntary turnover rates increase by about 31 percent.

• If downsizing is unavoidable, adopting practices such as job embeddedness (e.g., flextime, on-site child care, and defined-benefit plans) and proce- dural justice prior to the downsizing may reduce the consequences of downsizing resulting from higher voluntary turnover, induce the least valu- able employees to leave, and encourage the most valuable employees to stay.

Source: Adapted from C. Trevor and A. Nyberg, “Keeping Your Headcount When All About You Are Losing Theirs: Downsizing, Voluntary Turnover Rates, and the Moderating Role of HR Practices,” Academy of Management Journal, Vol. 51, (2008): 259–276.

Despite the guilt associated with permanently reducing the workforce, a growing number of firms are willing to downsize and are discovering that workforce reduction can lead to many unwanted consequences.65 Some of these consequences include the high human costs, psychological trauma experienced by both those let go and the survivors, reduced employee commitment, lower performance among employees due to job insecurity, greater attention by management to the downsizing process while ignoring customer and client needs, a shift from innovation to protection of one’s turf, lower morale, potential litigation by employees who believe that they are victims of discrimination, and a loss of valuable employees (see HR Planning Today 10.5).

One study examined “serial downsizers” (i.e., firms that had downsized the work- force both when the study began and five years later). The serial downsizers had the poorest scores when considering changes in employee satisfaction (e.g., poorer morale, quality of work life, commitment to the organization). While the “late downsizers” (those organizations that had downsized only recently) also had negative scores on

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the employee satisfaction measures, the “early downsizers” did not significantly differ from those employers that did not downsize throughout the period of the study. In other words, it appears that the negative people consequences associated with the early downsizing had dissipated over the five-year period.66

One issue that has received little attention is the effect of downsizing on the orga- nization’s reputation for corporate social performance (RCSP). Reputation for corporate social performance can be defined as “the firm’s reputation for principles, processes and outcomes related to the social impact of the firm’s operations.”67 An organiza- tion’s RCSP is one of the most important intangible assets of a business and an impor- tant source of competitive advantage. In addition, it may be critical to attracting and retaining quality employees. Although considered an acceptable business practice, there is evidence that downsizing has a negative impact on an organization’s RCSP and is even more pronounced for organizations that had high financial performance prior to the downsizing.68 Still, some organizations make a concerted effort to assist displaced employees:

In late November 2017, Sobeys reported that 800 employees were losing their jobs in an effort to reduce costs and build an e-commerce presence. In an effort to soften the blow, the company indicated that it had established the Sobeys Support Program for displaced workers at the Stellarton, Nova Scotia location. Among the features of the program are 100% tuition coverage for any Nova Scotia Com- munity College program and loan guarantees of up to $300,000 for employees starting up their own business.69

In a systematic review of articles examining downsizing and corporate social responsibility (CSR) over a 30-year period, Ahlstrand and Rydell noted that half of the articles addressed how companies acted in a socially responsible manner by assisting employees coping with job loss and helping them transition to new job opportunities and about 30 percent of the research examined corporate social responsibility and business strategy (with firms often employing a number of management strategies and tactics). They concluded that the reasons firms use a CSR approach were not clearly identified and the outcomes from using CSR often neglected key social and economic effects.70

Another issue beginning to attract attention is the relationship between downsizing and employee safety. The research evidence suggests that downsizing creates job insecurity, which is strongly associated with low levels of job satisfaction. Low job satisfaction, in turn, is related to safety motivation (the incentive to work safely) and safety knowledge (an understanding of safe operating procedures). When safety motivation is low, employees are less likely to engage in “safety compliance,” that is, comply with safety procedures and carry out their work in a safe manner. Finally, lower levels of safety compliance are associated with more workplace accidents. It is suggested that during a downsizing, employees concerned with keeping their jobs view productivity as more important than safety. However, in downsizings in which employees perceived the safety climate as positive and the organization viewed safety as very important, the negative outcomes associated with job insecurity were not seen.71 Recent research suggests that employee perceptions of job insecurity are associated with both a greater likelihood of experiencing an accident and a reduced probability of reporting an accident to company personnel.72 In addition, the prevalence of workplace injuries has been linked with both job insecurity and a hostile work environment.73

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DOWNSIZING STRATEGIES If an organization is not “lean and mean” enough, downsizing might be an appropriate strategic response. However, cutting the number of people in an organization is not a quick fix; prior to embarking on any workforce reduction effort, firms should carefully consider the consequences. Considerable care and planning must go into the decision, and the reasons for the reduction must be effectively communicated to employees. In addition, managers frequently have little experience or training with regard to downsizing and restructuring.

From a strategic perspective, an important decision involves answering questions such as: Should we downsize? When should we do it? How should we do it? The focus should be on rightsizing, which involves establishing a shared vision of the organization and a clearly stated strategy supported by management, understood by employees, and involving a sense of “ownership” by members of the firm.74

It is critical that the HR department play a very active role in the early stages of formulating a downsizing strategy. There is evidence that negative outcomes associated with downsizing might be mitigated by increased communication and employee par- ticipation and systematic analysis (in advance) of tasks and personnel requirements.75 In addition, senior management has to take an aggressive, visible, and interactive role in formulating the downsizing strategy. However, the identification, development, and implementation procedures should involve the employees. In many instances, the iden- tification of inefficiencies and areas where improvements are possible is best left to employees, who typically are in a better position to make such judgments.

STRATEGIC DOWNSIZING Why do so many workforce reduction programs fail to meet expectations? Many orga- nizations engaging in downsizing had no policies or programs to address problems associated with cutting human resources, and several organizations failed to anticipate the dramatic impacts workforce reduction has on the work environment, employees, customers, and clients. Furthermore, a number of downsizing efforts were not integrated as part of the organization’s overall strategic plan.76

An effective downsizing depends on comprehensive planning for change; proper com- munication of the plan; credibility of the organization with employees, customers, suppliers, and other stakeholders; and consideration and compassion both for employees who are terminated and those remaining.77 Moreover, firms engaging in downsizing typically focus only on workforce reduction aspects of the strategy and ignore the more time-consuming but critical strategies of redesigning the organization and developing a systematic strategy predicated on massive cultural change within the firm. Research in both Canada and the United States indicates that while almost all organizations engaging in downsizing focus on the first component (workforce reduction), only about one-half make some attempt at work redesign and less than one-third implement a systematic change strategy.

One study compared the effect of the three downsizing strategies (workforce reduc- tion, organizational redesign, and systematic change) on two performance outcome mea- sures (cost reduction and quality improvement).78 It found that the workforce reduction strategy was negatively related to organizational performance, while the organizational redesign and systematic change strategies were associated with improved performance. Moreover, mutual trust between employees and senior management plays an important role in the success of organizational redesign and systematic change strategies.

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EFFECTIVE AND INEFFECTIVE APPROACHES A number of studies have pointed out downsizing strategies and practices that do not work. For instance, Cameron, Freeman, and Mishra developed a list of six best practices in downsizing firms:79

1. Downsizing should be initiated from the top but requires hands-on involve- ment from all employees.

2. Workforce reduction must be selective in application and long term in emphasis.

3. Special attention should be paid both to those who lose their jobs and to the survivors who remain with the organization.

4. Decision makers should identify precisely where redundancies, excess costs, and inefficiencies exist and attack those specific areas.

5. Downsizing should result in the formation of small, semi-autonomous orga- nizations within the broader organization.

6. Downsizing must be a proactive strategy focused on increasing performance.80

Although the importance of communication is widely acknowledged, it appears that communication during downsizing is particularly difficult because of the nega- tive effect on the informal communication networks in an organization. It is impor- tant to (1) attend to rumours, (2) provide survivors with available information on the downsizing, (3) ensure that survivors are aware of the new organizational goals, (4) make expectations clear, (5) tell survivors that they are valued, and (6) allow time for grieving.81

// THE “NEW DEAL” IN EMPLOYMENT AND THE PSYCHOLOGICAL CONTRACT

You’re expendable. We don’t want to fire you but we will if we have to. Com- petition is brutal, so we must redesign the way we work to do more with less. Sorry, that’s just the way it is. And one more thing—you’re invaluable. . . . We’re depending on you to be innovative, risk-taking, and committed to our goals.82

What does this mean for employees? In many organizations, we have moved away from the expectation of lifetime employment.83 Rather, workers should prepare for a “multiorganizational career” and recognize that it is highly unlikely that they will remain with the same organization throughout their working lives.

An important part of the employment relationship is the psychological contract (those unwritten commitments between employers and employees). Over the past three decades, the psychological contract between employers and employees has changed dramatically. Historical notions of job security and rewards for loyal and long service to the organization have, in many instances, been replaced by ongoing change, uncer- tainty, and considerable shedding of employees. Associated with such developments are the considerable pain, stress, and hardship inflicted on employees, including both workers who have lost jobs and survivors who remain with an organization (see HR Planning Today 10.6).

Psychological contract An unwritten com- mitment between employers and their employees that his- torically guaranteed job security and rewards for loyal service

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A number of organizations try, as part of their HR planning and development activities, to hire from within the firm (where possible). Such organizations develop internal labour markets in which new employees are hired at specific “ports of entry,” and other positions are filled through internal transfers and promotions. Historically, employers and employees often had an implicit contract based on the notion that there was a mutual commitment by both employers and workers to long-term employment, and job hirings were viewed as “implicit contracts” in which employees are given certain assurances regarding security of wages and employment. However, such contracts have been radically altered or have ceased to exist in many organizations.

Does it really matter if the psychological contract is breached (i.e., the perception is that that one party has failed to live up to its obligations)? In one study, employees who perceived that their employer breached the psychological contract were more likely to report lower levels of trust in the employer, reduced performance, increased use of sick leave, and a greater intention of leaving the organization.84

Human resources experts have a considerable role to play in downsizing and restruc- turing. Some considerations are as follows:85

• Advising on restructuring the organization (work groups, teams, departments, and so on) to maximize productivity and retain quality performers

• Developing skill inventories and planning charts to evaluate the impact of a downsizing on HR needs and projected capabilities

• Communicating the downsizing decision effectively • Evaluating the downsizing program after completion. This includes an assess-

ment of who left the organization and who remains. Some key issues include job design and redesign, worker adjustment to change, the need for employee counselling, organizational communication, and a review of the appropriate- ness of HRM policies and programs (training, compensation and benefits, ori- entation of employees into the “new” organization, etc.).86

HR PLANNING TODAY 10.6

LOSING A JOB AND SOCIAL WITHDRAWAL

What is the impact on your social life of losing your job? Using data from high school graduates tracked over a 45-year period, one study revealed that being laid off once made people approximately 30 to 35 percent less likely to join a social organization. Study author Jennie Brand indi- cated, “We found that workers who were displaced were less likely to participate in arranged activities, whether church groups and church attendance, charitable orga- nizations—a big one was youth groups and community

groups—and even social gatherings with friends or country club organizations.”

It should also be noted that individuals who were downsized only once were less likely to engage in social activities than those who had been laid off more frequently. It was speculated that individuals working in jobs with low job security become more accustomed to downsizing and are not as negatively affected by the experience as those who are downsized for the first time.

Source: Adapted from “Layoffs Lead to Social Withdrawal,” Vancouver Sun, September 2, 2008, C7. Material reprinted with the express permission of: “CANWEST NEWS SERVICE,” a CanWest Partnership.

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LABOUR RELATIONS ISSUES Practitioners in unionized organizations often face additional challenges when partici- pating in the restructuring process. In any downsizing involving a union, it is critical that management representatives read the collective agreement. While this should go without saying, in many instances practitioners do not follow this advice. The collective agreement often outlines the procedures to be followed in the event of a reduction of bargaining unit employees. Of particular relevance are clauses addressing notice-period requirements in the event of a layoff and provisions dealing with seniority.

There has been a movement in labour relations toward greater cooperation between labour and management and the emergence of new employment relationships. However, changes in managerial attitudes and behaviours are necessary if cooperation between labour and management will succeed; unfortunately, many downsizing programs have destroyed positive labour relations programs. One study of workforce reduction in the unionized environment revealed that labour–management climate was lower (the quality of the labour–management relationship was more adversarial) for those bargaining units that experienced a reduction of the workforce. Of note was that this result was consistent when considering both employer respondents and union officials.87

A second study explored the adoption of high-performance work practices in union- ized environments and the role of employment security. The results indicated that the use of high-performance work practices declined as union representation increased. However, this finding was affected by the employer’s commitment to job security. Among companies with a low commitment to job security, the use of high-performance work practices declined markedly as the percentage of the workforce represented by a union increased. However, where commitment to job security was high, the use of high-performance work practices rose modestly as unionization increased. In other words, providing employment security appears to temper the effect of unionization on the adoption of high-performance work practices.88

Should unions participate in management-initiated restructuring efforts? One case study documented the experiences of three union locals involved in the process of restruc- turing. Each union local negotiated with the employer over the issue of workplace restruc- turing, but the substance of the bargaining as well as the level of involvement by the union and its members varied noticeably. However, it is possible to identify two distinct union responses. The interventionist response was characterized by early involvement in the restructuring process and the involvement of a broad cross-section of the union member- ship in the development and implementation of the new form of work organization. On the other hand, the pragmatic response was one in which the union relied on the employer to make workplace changes and then negotiated with management over the impact of such changes. While this response is not surprising, the study results indicate that it may not be the optimal response—in redesigning the work, management has limited information about the work itself and workplace norms, the change does not proceed through a series of steps in which union input is sought, and the lack of involvement in the process leads to lower commitment to change on the part of the union and its members.89

It remains to be seen how true cooperation can exist when the job security of employees is threatened. By way of example, union leaders frequently report that joint committees and employee involvement programs are designed to get workers to make suggestions that increase productivity at the cost of job security. Although a positive labour climate is often associated with favourable organizational outcomes, achieving such a climate is very difficult, and good relationships have been destroyed when firms embarked on a program of cutting jobs.

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// SUMMARY HR planning plays an important role in the development and implementation of an effective downsizing strategy. The “job for life” approach has been radically changed in the past decade, resulting in a number of new challenges for both employees and employers. It does not appear that the downsizing phenomenon is over, and con- sequently HR professionals must have a solid understanding of how to manage the downsizing process.

There is considerable evidence that many downsizings fell far short of achieving the goals that senior management expected. In a number of organizations, downsizing was followed by lower morale, greater conflict, reduced employee commitment, and poorer financial performance. Moreover, many downsizings were carried out without considering the strategic objectives of the organization, and many employers failed to assess how downsizing would affect its victims, surviving employees, the organization, customers, or society. Managing human resources in a time of cutback management presents several unique challenges to the HRM professional.

KEY TERMS distributive justice p. 267 downsizing p. 255 downsizing strategy p. 254 inplacement p. 262 interactional justice p. 267 outplacement p. 262 procedural justice p. 267 psychological contract p. 274 survivors (of downsizing) p. 254 systematic change p. 256 work redesign p. 256 workforce reduction p. 255

DISCUSSION QUESTIONS 1. What can managers embarking on an organizational downsizing do to minimize

the impact of the process on the “survivors” of downsizing? 2. Discuss the effect of the “Amazon Effect” on the workplace of the future. 3. “It is a lot harder downsizing unionized employees.” Do you agree with this state-

ment? Discuss some of the challenges associated with downsizing in a union environment.

4. What is the “psychological contract”? Why has it changed over the past 25 years? When considering the next 10 years, what changes to the psychological contract do you envision?

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EXERCISES 1. Discuss the following statement: “Artificial intelligence (AI) will have a major change

on the jobs of the future and employers that want to survive and prosper will need to engage in organizational restructuring.”

2. Interview three employees who are survivors of a downsizing. Ask them to discuss how the downsizing was conducted and its effects on them personally and on the organization.

3. Meet with an HRM professional or a senior management official whose organiza- tion has gone through a downsizing. Ask the individual to describe the downsizing strategy employed by his or her organization. Consider Cameron’s three downsizing strategies of workforce reduction, work redesign, and systematic change. To what extent did the organization use any or all of these strategies?

CASE STUDY A DOWNSIZING DECISION AT THE DEPARTMENT OF PUBLIC WORKS

Kathleen Pool is a human resources officer with a municipal government in a town of just over 25 000 people. A well-known consulting firm, in cooperation with senior government officials, recently completed a detailed audit of government operations. As a result of the audit, selected government departments (including the Department of Public Works) were targeted for restructuring. The consultants made it clear in their report that they believed that the budget allocation for the Department of Public Works was “adequate” and recommended that the depart- ment receive a 1.5 percent annual increase in funding for the next two years. Note that operating costs for the department are projected to increase at a rate of about 3.5 percent annually.

Kathleen has been given the responsibility of managing the restructuring at the Department of Public Works. Rather than directing the department to cut a specific number of jobs, Kathleen has been asked to develop a restructuring strategy that will meet the town’s mission of “providing quality service to its residents in a cost-effective manner.” She is currently reviewing the operating policies at the Department of Public Works.

The Department of Public Works is responsible for tasks such as garbage col- lection, basic sidewalk and road maintenance, city parks and arenas, installation of street signs and parking meters, and snow removal. At the present time, employees work in one of three subunits: garbage collection, parks and recreation, or city maintenance. Each of the subunits is housed in a separate building, and has its own equipment, supplies, and operating budget. As well, while employees can formally apply to transfer to a different subunit, the managers of the subunits involved and the Director of Public Works (who is responsible for the overall operation of the Department) must all agree. Unless a vacancy at one of the subunits arises, it is rare that any employee transfer will be approved.

In 2012, the Department of Public Works underwent a considerable down- sizing and 4 percent of its permanent positions were cut. In addition, the depart- ment stopped its practice of hiring summer students from local high schools and

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universities in an effort to cut costs. Prior to this, students were employed over the summer to help with special projects and to cover vacation periods for full-time employees. In 2015, a smaller cutback of 2 percent of the workforce took place.

In 2016, the municipality brought back the practice of hiring summer students. This decision was welcomed by the full-time employees at the Department of Public Works, in particular because it allows the employees much more flexibility in selecting their vacation time. From 2012 to 2015, management put considerable restrictions on when employees could go on vacation; employees with 10 or more years of service could have a maximum of one week’s vacation in July or August while employees with less than 10 years of service were not permitted to go on vacation during these two months. Under the collective agreement, management has the right to determine the vacation schedule of unionized employees.

In reviewing turnover data for the Department of Public Works, Kathleen found that very few full-time employees quit their jobs to pursue other employ- ment opportunities. In addition, dismissals for cause were rare; over the past 10 years, only two employees were terminated for cause. In both cases, the union lost the discharge grievance at an arbitration hearing.

Since the early 2000s, the municipality has had a local consulting firm con- duct surveys of both municipal employees and the users of government services. A summary of the findings from the employee survey (for Department of Public Works employees only) is contained in Table 10.1. Note that each of the items (such as employee morale) is measured on a 5-point scale (1 very low; 5 very high).5 5 Similarly, Table 10.2 contains summary information from the survey of municipal residents concerning the performance of the Department of Public Works. Again, respondents were asked to reply using a 5-point scale (1 very low; 5 very high)5 5 . Note that on both the employee survey and the users of government services survey, there were only minor differences in the results when the data were broken down by subunit (garbage collection, parks and recreation, or city maintenance).

TABLE 10.1

SUMMARY RESULTS FROM A SURVEY OF PUBLIC WORKS EMPLOYEES

YEAR EMPLOYEE MORALE

EMPLOYEE COMMITMENT TO

DEPARTMENT

OVERALL EMPLOYEE JOB SATISFACTION

INTENTION TO STAY WITH THE MUNICIPALITY

2011 3.89 3.72 4.02 4.77

2012 2.21 1.99 2.34 4.11

2013 2.36 2.22 2.87 3.77

2014 2.65 2.62 3.22 3.99

2015 2.38 2.33 2.66 4.44

2016 2.88 3.01 2.99 4.5

2017 3.54 3.52 3.88 4.72

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280 NELStrategic Human Resources Planning

QUESTIONS

1. Outline the issues that Kathleen should consider prior to designing a restructuring strategy.

2. Design a strategy to restructure the Department of Public Works. Be sure to provide support for the decisions/recommendations you propose.

3. A recent newspaper editorial suggested that the town contract out the collection of garbage. What are the advantages/disadvantages of con- tracting out services that had been provided by government?

TABLE 10.2

SUMMARY RESULTS FROM A SURVEY OF MUNICIPAL RESIDENTS

YEAR LEVEL OF SATISFACTION WITH THE BOARD OF PUBLIC WORKS

QUALITY OF SERVICE PROVIDED BY THE BOARD OF PUBLIC WORKS

2011 3.95 3.88

2012 3.22 3.01

2013 3.34 3.24

2014 3.65 3.66

2015 3.56 3.49

2016 3.78 3.72

2017 4.01 3.98

// REFERENCES 1. The sources of these headlines are “Loblaw Layoffs Will Affect 500 Office

Workers,” HuffPost, www.huffingtonpost.ca, October 16, 2017; “Bell Media Confirms Local Radio and TV Layoffs,” CBC News, www.cbc.ca, November 20, 2017; and “Up to 225 Workers to be Laid Off at St. Catharines, Ont. GM Facility,” Toronto Star, www.thestar.com, September 21, 2017.

2. Gordon, S. 2014. “Your Job Is As Safe As It Has Ever Been. Probably Safer.” Maclean’s, January 8.

3. Vanian, J. 2017. “Microsoft Expected to Cut ‘Thousands’ of Jobs.” July 6. http://www.fortune.com.

4. “Brexit to Affect About 10,000 London Finance Jobs, Survey Finds.” 2017. The Globe and Mail, September 19, p. B9.

5. “Quebec Lumber Workers Among the First to Feel Pain of Layoffs from U.S. Softwood Lumber Dispute. 2017. Financial Post. http://business.financial- post.com, May 15.

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6. Cameron, K. 1994. “Strategies for Successful Organizational Downsizing.” Human Resource Management, Vol. 33: 189–211.

7. Datta, D., J. Guthrie, D. Basuil, and A. Pandey. 2010. “Causes and Effects of Employee Downsizing: A Review and Synthesis.” Journal of Management, Vol. 36: 282; Sheaffer, Z., A. Carmeli, M. Steiner-Revivo, and S. Zionit. 2009. “Downsizing Strategies and Organizational Performance.” Management Decision, Vol. 47: 951.

8. Cameron, K. 1994. “Strategies for Successful Organizational Downsizing.” Human Resource Management Vol. 33: 189–211.

9. Ibid.

10. McKinley, W., and A. Scherer. 2000. “Some Unanticipated Consequences of Organizational Restructuring.” Academy of Management Review, Vol. 25: 735–752.

11. Kane, B. 2000. “Downsizing, TQM, Re-engineering, Learning Organizations and HRM Strategy.” Asia Pacific Journal of Human Resources, Vol. 38: 26–49.

12. Pfeffer, J. 2010. “Lay off the Layoffs.” Newsweek, February 15, p. 12. 13. Love, E., and N. Nohria. 2006. “Reducing Slack: The Performance

Consequences of Large Industrial Firms, 1977–93.” Strategic Management Journal, Vol. 26: 1087–1108.

14. JoAnn Alberstat, “Kelly’s Packs it in After 138 Years,” December 2, 2014, the Chronicle Herald. Republished with permission from the Chronicle Herald.

15. Santana, M., R. Valle, and J. Galan. 2017. “Turnaround Strategies for Companies in Crisis: Watch Out the Causes of Decline Before Firing People.” Business Research Quarterly, Vol. 20: 206–211.

16. Financial Post, June 30, 2001, p. C2. 17. Strauss, M. 2017. “No Severance Pay for Sears Canada Staff.” The Globe and

Mail, June 24, p. B1. 18. Bickis, I. 2017. “Retention Bonuses Spark Outcry.” Chronicle Herald. July 15,

p. B8.

19. Strauss, M. 2017. “Who Killed Sears.” The Globe and Mail, October 21, p. B9-12.

20. Dobson, S. 2017. “Sears Provides Lessons for HR.” Canadian HR Reporter, September 18: 1, 6.

21. Blatchford, A. 2017. “Bank of Canada Warns Automation Will Lead to Job Losses.” The Globe and Mail, April 18.

22. Frey, C., and M. Osborne. 2013. The Future of Employment. Oxford Martin Programme on Technology and Employment.

23. See Lamb, C. 2016. The Talented Robot—The Impact of Automation on Canada’s Workforce. The Brookfield Institute for Innovation, June; Arntz, M., T. Gregory and U. Zierahn. 2016. The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis. OECD Social Employment and Migra- tion Working Papers, No. 189, OECD; Oschinski, M., and R. Wyonch. Future Shock? The Impact of Automation on Canada’s Labour Market. C.D. Howe Institute.

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24. “42% of Canadian Jobs at High Risk of Being Affected by Automation, New Study Suggests. 2016. CBC News. www.cbc.ca/news. June 15.

25. Mahdawi, A. 2017. “What Jobs Will Still Be Around in 20 Years? Read This to Prepare Your Future.” The Guardian, June 26.

26. Sagan, A. 2017. “Retail Jobs Being Put at Risk, Experts Say.” Chronicle Herald, October 25, p. B4.

27. See The Intelligence Revolution: Future-proofing Canada’s Workforce. Deloitte and Human Resources Professional Association of Canada, 2017.

28. Wingfield, N. 2017. “As Amazon Pivots Toward Automation, Workers Assume More “Engaging’ Roles. The Globe and Mail, September 18.

29. Nguyen, L. 2017. “Sobeys Gains Robots, Productivity.” Chronicle Herald, June 16, pp. B1, B4.

30. Latack, J. 1990. “Organizational Restructuring and Career Management: From Outplacement and Survival to Inplacement.” In G. Ferris and K. Rowland, eds., Research in Personnel and Human Resources Management, pp. 109–139. Greenwich, CT: JAI Press.

31. Clancy, C. “NDP Launches Fund to Support Unemployed Coal Workers,” Edmonton Journal, November 11, 2017, http://edmontonjournal.com/news/ politics/ndp-launches-fund-to-support-to-unemployed-coal-workers.

32. Vickers, M. 2009. “Journeys into Grief: Exploring Redundancy for a New Understanding of Workplace Grief,” Journal of Loss and Trauma, Vol. 14: 412.

33. See Arce, D., and S. Xin Lee. 2011. “Profits, Layoffs and Priorities.” Journal of Business Ethics, Vol. 101: 49–60.

34. See Rosenblatt, Z., and Z. Schaeffer. 2000. “Ethical Problems in Downsizing.” In R. Burke and C. Cooper, eds., The Organization in Crisis: Downsizing, Restructuring and Privatization, pp. 132–150. Malden, MA: Blackwell.

35. Lawrence, E., and K Kacmar. 2017. “Exploring the Impact of Job Insecurity on Employees’ Unethical Behaviour. Business Ethics Quarterly, Vol. 27: 39–70.

36. Vickers. 2009: 410. 37. Amundson, N., W. Borgen, S. Jordan, and A. Erlebach. 2004. “Survivors of

Downsizing: Helpful and Hindering Experiences.” The Career Development Quarterly, Vol. 52: 256–271, 260. Also see “Downsizing with Dignity.” 2017. www.thebalance.com, February 15.

38. “If You Must Lay Off.” 2002. Canadian HR Reporter, April: 4. 39. These quotes are taken from Parris, M., and M. Vickers. 2010. “‘Look at

Him. . . . He’s Failing’: Male Executives’ Experiences of Redundancy.” Employee Responsibilities and Rights Journal, Vol. 22: 350.

40. Cappelli, P. 1995. “Rethinking Employment.” British Journal of Industrial Relations, Vol. 33: 563–602.

41. Immen, W. 2008. “When Flames of Fear Lick at Your Feet.” The Globe and Mail, May 7, p. C1.

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42. Feldman, D., and C. Leana. 1994. “Better Practices in Managing Layoff.” Human Resource Management, Vol. 33: 239–260.

43. Amundson, N., W. Borgen, S. Jordan, and A. Erlebach. 2004. “Survivors of Downsizing: Helpful and Hindering Experiences,” The Career Development Quarterly Review, Vol. 52: 256–271, 260.

44. The Labour Force Participation Rate was 65.7% in November 2017 (see www.tradingeconomics.com).

45. See Grant, T. 2014. “Labour Force Participation Rate Stuck at 13-Year Low.” The Globe and Mail, December 6, p. B6; Grant, T. 2014. “The 15-Hour Work Week: Canada’s Part-Time Problem.” The Globe and Mail, October 4, pp. B6, B7.

46. Lee, C. 1992. “After the Cuts.” Training, Vol. 29: 17–23. 47. See Davy, J., A. Kinicki, and C. Scheck. 1997. “A Test of Job Security’s Direct

and Mediated Effects on Withdrawal Cognitions.” Journal of Organizational Behavior, Vol. 18: 323–349; Rosenblatt, Z., and A. Ruvio. 1996. “A Test of a Multidimensional Model of Job Insecurity: The Case of Israeli Teachers.” Journal of Organizational Behavior, Vol. 17: 587–605.

48. Sverke, M., and J. Hellgren. 2002. “The Nature of Job Insecurity: Under- standing Employment Uncertainty on the Brink of a New Millennium.” Applied Psychology: An International Review, Vol. 51: 23–42; Jiang, J and T. Probst. “The Moderating Effect of Trust in Management on Consequences of Job Insecurity.” Economic and Industrial Democracy, forthcoming.

49. Armstrong-Stassen, M. 1993. “Survivors’ Reactions to a Workforce Reduction: A Comparison of Blue-Collar Workers and Their Supervisors.” Canadian Journal of Administrative Sciences, Vol. 10: 334–343.

50. See Molinsky, A., and J. Margolis. 2006. “The Emotional Tightrope of Downsizing: Hidden Challenges for Leaders and their Organizations.” Organizational Dynamics, Vol. 35: 145–159, 146.

51. Mone, M. 1994. “Relationships between Self-Concepts, Aspirations, Emotional Responses, and Intent to Leave a Downsizing Organization,” Human Resource Management, Vol. 33: 281–298.

52. Maertz, C., J. Wiley, C. LeRouge, and M. Campion. 2010. “Downsizing Effects on Survivors: Layoffs, Offshoring and Outsourcing.” Industrial Relations, Vol. 49: 275–285.

53. Wright, B., and J. Barling. 1998. “The Executioner’s Song: Listening to Downsizers Reflect on their Experiences.” Canadian Journal of Administrative Sciences, Vol. 15, 339-355.

54. Gandolfi, F. 2009. “Executing Downsizing: The Experience of Executioners.” Contemporary Management Research, Vol. 5: 185–200.

55. Clair, J., and R. Dufresne. 2004. “Playing the Grim Reaper: How Employees Experience Carrying Out a Downsizing.” Human Relations, Vol. 57, No. 12: 1608.

56. See A. Molinsky, A., and J. Margolis. 2006. “The Emotional Tightrope of Downsizing: Hidden Challenges for Leaders and Their Organizations.” Organizational Dynamics, Vol. 35: 145–159, 152.

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57. Nixon, R., M. Hitt, H. Lee, and E. Jeong. 2004. “Market Reactions to Announcements of Corporate Downsizing Actions and Implementation Strategies.” Strategic Management Journal, Vol. 25: 1121–1129.

58. Negre, E., M. Verdier, C. Cho, and D. Patten. 2017. “Disclosure Strategies and Investor Reactions to Downsizing Announcements: A Legitimacy Per- spective.” Journal of Accounting and Public Policy, Vol. 36: 239–257.

59. Cascio, W., C. Young, and J. Morris. 1997. “Financial Consequences of Employment-Change Decisions in Major U.S. Corporations.” Academy of Management Journal, Vol. 40: 1175–1189.

60. DeMeuse, K., T. Bergmann, P. Vanderheiden, and C. Roraff. 2004. “New Evidence Regarding Organizational Downsizing and a Firm’s Financial Analysis.” Journal of Management Inquiry, Vol. 16: 155–177.

61. Love and Nohria. 2006. 62. Chhinzer, N. and E. Currie. 2014. “Assessing Longitudinal Relationships

Between Financial Performance and Downsizing.” Management Decision, Vol. 52: 1474–1490. Also see Brauer, M. and T. Laamanen. 2014. “Workforce Downsizing and Firm Performance: An Organizational Routine Perspective.” Journal of Management Studies, Vol. 51: 1311–1333.

63. An excellent review of the relationship between downsizing and both employer and employee outcome measures is provided in Datta, D., J. Guthrie, D. Basuil, and A. Pandey. 2010. “Causes and Effects of Employee Downsizing: A Review and Synthesis.” Journal of Management, Vol. 36: 281–348.

64. Cascio, W. 2002. Responsible Restructuring: Creative and Responsible Alternatives to Layoffs. San Francisco: Berrett-Koehler.

65. Tomasko, R. 1990. Downsizing: Reshaping the Corporation of the Future (2nd ed.). New York: AMACON.

66. Wagar, T., and K. Rondeau. 2002. “Repeated Downsizing, Organizational Restructuring and Performance: Evidence from a Longitudinal Study.” Proceedings of the Administrative Sciences Association of Canada (HRM Division). Winnipeg. For a study with similar results based on data from New Zealand see Gilson, C., F. Hurd, and T. Wagar. 2004. “Creating a Concession Climate: The Case of the Serial Downsizers.” International Journal of Human Resource Management, Vol. 15: 1056–1068.

67. Zyglidopoulos, S. 2004. “The Impact of Downsizing on the Corporate Reputation for Social Performance.” Journal of Public Affairs, Vol. 4: 13.

68. Ibid: 11–25. Also see Bergstrom, O., and A. Diedrich. 2011. “Exercising Social Responsibility in Downsizing: Enrolling and Mobilizing Actors in a Swedish High-Tech Company.” Organization Studies, Vol. 32: 897–919.

69. See R. Taylor, “Sobeys Works to Soften Blow,” the Chronicle Herald, Saturday, November 25, 2017, p. B1; “Sobey Launches Job Retraining Program,” the Chronicle Herald, Tuesday, November 28, 2017, p. B4.

70. Ahlstrand, R., and A. Rydell. 2017. “Corporate Social Responsibility in Connection with Business Closures and Downsizing: A Literature Review. Contemporary Management Research, Vol. 13: 53–78.

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71. For an interesting review of the safety–job insecurity issue, see Probst, T. 2004. “Job Insecurity: Exploring a New Threat to Employee Safety.” In J. Barling and M. Frone, eds. 2004. The Psychology of Workplace Safety. Washington: APA, pp. 63–80.

72. Probst, T., C. Barbaranelli, and L. Petitta. 2013. “The Relationship Between Job Insecurity and Accident Under-reporting: A Test in Two Countries. Work and Stress, Vol. 27: 383–402.

73. Farnacio, Y., M. Pratt, E. Marshall, and J. Graber. 2017. “Are Workplace Psychosocial Factors Associated with Work-Related Injury in the US Work- place?” Journal of Occupational and Environmental Medicine, Vol. 59: 164–171.

74. Hitt, M., B. Keats, H. Harback, and R. Nixon. 1994. “Rightsizing: Building and Maintaining Strategic Leadership and Long-Term Competitiveness.” Organizational Dynamics, Vol. 23: 18–32; Lamarsh, J. 2009. “How Companies Reduce the Downside of Downsizing.” Global Business and Organizational Excellence, November/December: 7–16.

75. Cameron, K. 1994. “Strategies for Successful Organizational Downsizing.” Human Resource Management, Vol. 33: 189–211. Also see Chadwick, C., L. Hunter, and S. Walston. 2004. “Effects of Downsizing Practices on the Performance of Hospitals.” Strategic Management Journal, Vol. 25: 405–427.

76. Galagan. 2010. 77. Kammeyer-Mueller, J., H. Liao, and R. Arvey. 2001. “Downsizing and

Organizational Performance: A Review of the Literature from a Stakeholder Perspective.” In G. Ferris, ed., Research in Personnel and Human Resource Man- agement. Amsterdam: JAI Press, pp. 269–329.

78. Mishra, A., and K. Mishra. 1994. “The Role of Mutual Trust in Effective Downsizing Strategies.” Human Resource Management, Vol. 33: 261–279.

79. Cameron, K., S. Freeman, and A. Mishra. 1991. “Best Practices in White Collar Downsizing: Managing Contradictions,” Academy of Management Executive, Vol. 5: 57–73.

80. Ibid. 81. Dunlap, J. 1994. “Surviving Layoffs: A Qualitative Study of Factors Affecting

Retained Employees After Downsizing.” Performance Improvement Quarterly, Vol. 7: 89–113.

82. O’Reilly, B. 1994. “The New Deal: What Companies and Employees Owe One Another.” Fortune, June 13, pp. 44–52.

83. Cappelli, P. 1995. “Rethinking Employment.” British Journal of Industrial Relations, Vol. 33: 563–602.

84. Rust, K., W. McKinley, G. Moon-Kyungpook, and J. Edwards. 2005. “ Ideological Foundations of Perceived Contract Breach Associated with Downsizing: An Empirical Investigation.” Journal of Leadership and Organizational Studies, Vol. 12: 37–52.

85. Mone, M. 1994. “Relationships between Self-Concepts, Aspirations, Emotional Responses, and Intent to Leave a Downsizing Organization,” Human Resource Management 33: 281–298.

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86. Ibid. 87. Wagar, T. 2001. “Consequences of Work Force Reduction: Some Employer

and Union Evidence.” Journal of Labor Research, Vol. 22: 851–862. 88. Liu, W., J. Guthrie, P. Flood, and S. MacCurtain. 2009. “Unions and the

Adoption of High Performance Work Systems: Does Employment Security Play a Role?” Industrial and Labor Relations Review, Vol. 63: 109–127.

89. Frost, A. 2001. “Reconceptualizing Local Union Responses to Workplace Restructuring in North America.” British Journal of Industrial Relations, Vol. 39: 539–564.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Identify key challenges influencing human resources (HR) practices and processes within an international context.

• Identify key characteristics of strategic international HRM (SIHRM). • Understand the relationship between different approaches of SIHRM

and corporate business strategy options. • Understand the impact of globalization and internationalization on

HR planning.

STRATEGIC INTERNATIONAL HRM

Portions of this chapter are based on a previous edition chapter written by Dr. Stefan Gröschl, ESSEC Business School, France.

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// INTRODUCTION Struggling to fit in is a key challenge for managers in their overseas assignments, and one of many critical HR aspects in the internationalization of Canadian companies and their employees. Fast-growing economies such as Brazil, Russia, India, China, and South Africa represent significant business opportunities and require Canadian companies to expand beyond their national boundaries. Despite the weakened global economy, Canada has remained one of the top 10 home economies with the highest outflow of foreign direct investments. According to the 2014 World Investment Report, in 2012, Canadian companies invested Cdn. $43 billion abroad.1 Yet entering growing economies and new markets means not only greater business opportunities for Canadian firms, but also a wide range of strategic and operational HR challenges.

When Linda Myers accepted a human resources posi- tion at SK Telecom in South Korea, she thought it was the opportunity she’d long been working toward. … For someone who’d spent years consulting on expatriate tran- sitions, this seemed like a dream job … Myers had never heard of SK when a recruiter e-mailed her, in July 2007. “Dear Mr. Myers,” the e-mail began. “They assumed I was a man,” she recalls. It was an innocent mistake, but it foreshadowed the misunderstandings to come. … The recruiter’s initial e-mail marked the start of a six-month interview process, including trips to New York and Santa Clara, California. … “I was working with a young man who spoke enough English to be the liaison for his boss, who spoke a little bit less English,” Myers recalls. That was to be expected in negotiations with a Korean company for a job in Korea, but the two-language game of telephone sometimes led to confusion. Still, she pressed ahead. In October, SK Telecom formally offered her a job. …

On the ground in Seoul, … one early shock was the homogeneity of not only her office but also the city: Government estimates indicate that foreigners account for 2.4!percent of the population. … Another surprise was her inability to communicate effectively. … She recalls having to ask for an interpreter at her first meetings at SK. And even with an assistant and colleagues who spoke English, she found it difficult to get the information she

needed. As she saw it, even diplomatic inquiries could be construed as confrontational and critical. She was also unprepared for the company’s rigid hierarchy. … Moreover, she was constantly aware of being female. Aside from secretaries, she was almost always the only woman in the room.

In spite of these challenges, Myers advanced at SK. Four months after her arrival, she moved on to be head of Global Talent at SK Holdings. But leadership shakeups changed the tenor of this role. Myers felt increasingly left out of key meetings and conversations, in part because language was still a problem, even though, according to SK, she by then had a mostly bilingual team, including three non-Koreans. Although Myers saw her role as that of a change agent, she struggled to implement new prac- tices and policies. “At the lower and middle levels, I think that people were very excited, very eager for change,” she explains. “But at the top, most of the leadership was nervous.”… By early 2009, Myers could tell she was on her way out. “My team leaders would barely speak to me,” she says. Finally, her boss called her into his office and explained that although they had extended her contract once, they would not do so again.

THE WOULD-BE PIONEER

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NEL 289CHAPTER 11 Strategic International HRM

// KEY CHALLENGES INFLUENCING HR PRACTICES AND PROCESSES WITHIN AN INTERNATIONAL CONTEXT When entering new markets, organizations are confronted with a wide range of challenges mostly related to socioeconomic, political, and technological aspects. Following is a brief discussion of some of the key issues HR managers face when their organizations expand across national borders.

WORKFORCE DIVERSITY Many articles in academic journals and the popular press have documented Canada’s growing workforce diversity. While the different dimensions of diversity provide Cana- dian organizations with many opportunities, Canada’s workforce diversity also produces a wide range of HR-related challenges, including the integration and accommodation of an increased number of older workers and employees with disabilities, diverse gender identities, and aspects related to ethnic and cultural differences among employees. Human resource management systems must consider and accommodate the needs of an increas- ingly diverse labour force and tailor international HR policies and practices accordingly.

EMPLOYMENT LEGISLATION HR managers of organizations operating across Canada are faced with a complex provincial and federal employment legislation framework. When crossing national borders, Canadian HR managers encounter additional host-country employment legislation and in the case of a European Union (EU) member state being the host country, employment laws and regulations of the host country and the EU. This wide range of home and host-country employment legislation represents a key challenge to HR managers and the development and implementation of employment policies, processes, and practices in Canadian organizations operating internationally.

SECURITY While Afghanistan and Iraq have been known for many years for their unsafe business environments, recent terrorist attacks in Pakistan and India; violent societal upheavals in Egypt, Bahrain, Tunisia, Algeria, Libya, and Syria; and organized crime and increased kidnappings in Venezuela, Mexico, Honduras, Nigeria, Somalia, and Sudan2 have raised serious concerns among internationally operating businesses for their expatriate employees’ security. Sophisticated HR support structures in areas of employee security and safety including risk assessment processes, precautionary actions and procedures, and contingency planning are critical aspects in ensuring that employees and their families deployed in dangerous or troublesome parts of the world always return home safely. Establishing close relationships with Canadian governmental overseas representatives

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(Canadian embassies, chambers of commerce, consulates, high commissions) in coun- tries in which employee security is a concern to foreign businesses is only one of many proactive security measures.3

// STRATEGIC INTERNATIONAL HUMAN RESOURCES MANAGEMENT The UPS example in HR Planning Today 11.1 illustrates the size, geographical distribu- tion, and level of internationalization of many multinational enterprises, highlighting the need for the methodical and careful planning of a strategic international HR approach.

Strategic international HR planning typically involves projecting global compe- tence supply, forecasting global competence needs, and developing a blueprint to estab- lish global competence pools within companies so that the supply of global managers worldwide will be sufficient to coincide with the multinational corporation’s (MNC) global strategies. Attracting and retaining managers who are competent to represent the company in a global arena have been rated as the most critical goals of international HRM by multinational corporations (MNCs).4

Moreover, international HR planning needs to fit with both the internal factors, such as a firm’s strategies, competencies, and existing HR systems, and the external factors including local economic, political, social, cultural, legal, and HR systems. Studies show that MNCs globalize HR practices issues such as pay systems, management develop- ment, or employee benefits. With other issues, such as wage determination, hours of work, forms of job contract, and redundancy procedures that are subject to local laws and convention, MNCs tend to follow the local practices, although the extent to which SIHRM practices fit with the local environment or with home headquarters varies from company to company and from country to country.7

Strategic international HR planning Projecting global competence supply, forecasting global competence needs, and developing a blueprint to establish global com- petence pools within companies

HR PLANNING TODAY 11.1

UPS AROUND THE WORLD

In 2014, the $55 billion multinational company UPS employed more than 395,000 people in 200 coun- tries and territories. For the core business, 13 regional directors had a total of 72 district managers reporting to them. And each of those 72 district managers ran an operation the size of a Fortune 1000 company. Besides its core business, UPS managed several other business units with revenues in excess of $1 billion.5 The size and geographical distribution of UPS creates a wide range of HR implications and challenges: respecting and adjusting to 200 or more different employment and human rights legislations, and industrial relations; selecting the right level or mix of centralizing and decentralizing UPS’s HR

function across countries, companies, and business units; creating HR structures and reporting systems supporting UPS’s HR strategic role and operational responsibilities in a proactive and flexible way; and responding to the wide range of different cultural value systems in UPS’s decision-making process about the level of standardiza- tion or adaptation of HR policies, processes, and practices. Failing to address these challenges can lead to a wide range of costly implications for UPS—from employment lawsuits due to, for example, lacking awareness of local employment practices, to labour relations disputes and strikes, and in the worst-case scenario, to surrendering and retreating from a foreign market.6

Source: J. Kirby, “Reinvention with Respect,” Harvard Business Review (November 2001): 117.

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NEL 291CHAPTER 11 Strategic International HRM

Strategic thinking is needed for SIHRM to project HR supply and to forecast HR needs for the foreign subsidiaries. Therefore, strategic international HRM is defined as “human resource management issues, functions, and policies and practices that result from the strategic activities of multinational enterprises and that impact the international concerns and goals of those enterprises.”8

THE DOMESTIC STAGE AND STRATEGY Organizations applying a domestic strategy become international by exporting goods abroad as a means of seeking new markets, focusing on domestic markets, and exporting their products without altering the products for foreign markets. Because this is an initial step of going international and there is no subsidiary in foreign countries, there is very little demand for the HR department to alter its existing domestic HR practices. Usually, an export manager is appointed by headquarters to take charge of the exporting business.

THE MULTIDOMESTIC STAGE AND STRATEGY As the firm develops expertise in the international market and as the foreign market grows in importance for the success of the organization, a subsidiary is typically set up, reflecting a multidomestic strategy.9 Management at this stage realizes that there are “many good ways” to do business and that cultural sensitivity is important to be successful in the local market. A polycentric perspective is a trademark of this stage, and firms use the multidomestic strategy to develop culturally appropriate products for local markets.

In line with this polycentric business strategy, the company’s SIHRM system will apply an adaptive IHRM approach, adopting local HR practices in the host country’s subsidiaries. French lodging giant ACCOR is taking this approach, and has adopted many local HRM practices in its U.S. subsidiaries in order to attract and retain local employees. Following an adaptive IHRM approach, a local executive is usually hired to take charge of the subsidiaries’ HR management. The advantage of this method is that the local HR manager for the subsidiaries is familiar with local issues, and there is no language barrier between the HR manager, local partners, and employees. Hiring a local HR manager can also guarantee the consistency of the HR practices with the local legal system and environ- ment. One disadvantage is if the local HR manager does not know the corporate culture well enough to reflect the overall corporate strategies and the corporate principles in the subsidiary HR system. Nevertheless, because HRM is very sensitive to local legal and economic systems, compared to other business functions, such as finance and manufac- turing, HRM has mostly adhered to local practices in many multinational corporations.10

THE MULTINATIONAL STAGE AND STRATEGY When more and more MNCs enter the same market, the competition from other mul- tinationals forces management to shift its strategy, resulting in the standardization of its products and services around the world to gain efficiency. Such a multinational strategy promotes a price-sensitive perspective with limited emphasis on cultural differences.11

Following the company’s multinational business strategy, HR systems will be stan- dardized across its subsidiaries all over the world. Numerous MNCs, such as Ernst & Young, have adopted such an exportive IHRM approach to reduce transaction costs,

Strategic international HRM Human resources management issues, functions, policies, and practices that result from the strategic activities of multi- national enterprises and that affect the international concerns and goals of those enterprises Domestic strategy Internationalizing by exporting goods abroad as a means of seeking new markets

Multidomestic strategy A strategy that concentrates on the development of foreign markets by selling to foreign nationals Adaptive IHRM approach HRM systems for for- eign subsidiaries that will be consistent with the local economic, political, and legal environment

Multinational strategy Standardizing the products and services around the world to gain efficiency Exportive IHRM approach Transferring home HRM systems to foreign subsidiaries without modifying or adapting to the local environment

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ensure the consistency of their corporate policies all over the world, and gain control over their subsidiaries.12 The advantage of this approach is that the HR managers at headquarters have a tried-and-true HR system and can readily implement it efficiently in subsidiaries in other countries. The disadvantage is that the local environment will not have been considered in the HR system, and the fit with the local system will be missing, which might cause problems for the subsidiaries’ management.

THE GLOBAL STAGE Companies adopting a global strategy are striving to introduce culturally sensitive prod- ucts with the least amount of cost. To accomplish this, resources and materials within regional branches are reallocated globally to make quality products at the lowest cost. A geocentric perspective is taken by the company management at this stage.

Fitting this global business strategy is an integrative IHRM approach combining home HR practices with local practices. The best HR policies and practices will be chosen for the foreign subsidiaries. For example, some Japanese companies have transferred some of their HR practices, such as job flexibility, intensive on-the-job training, teamwork, and cooperative relations between management and employees, to North America, but abandoned other practices, such as the use of uniforms.13 With this approach, not only can the best context-free HR practices be transferred to subsidiaries but also sound foreign practices can be learned and transferred to headquarters. The decision making regarding HR policies and practices will be jointly in the hands of headquarters and foreign subsidiaries. Therefore, this approach usually goes along with the global strategy and is recommended for the purpose of mutual learning between headquarters and sub- sidiaries. The challenge of using this approach is that the HR managers at headquarters need to have a geocentric or global perspective, be culturally sensitive, and be able to strategically move HR resources around the subsidiaries and headquarters, as illustrated by Four Seasons’ Golden Rule policy outlined in HR Planning Today 11.2.

Global strategy Introducing culturally sensitive products in chosen countries with the least amount of cost Integrative IHRM approach Combining home HR practices with local practices and selecting the most qualified people for the appro- priate positions no matter where these candidates come from

HR PLANNING TODAY 11.2

FOUR SEASONS’ GOLDEN RULE

While Four Seasons recognizes and responds to local differences at the same time, the Canadian hotels and resorts company thrives for global integration through globally uniform standards. Within the HR context, for example, Four Seasons’ key standard has been the “Golden Rule”:

Human resource management at Four Seasons starts and ends with “The Golden Rule,” which stipulated that one should treat others as one would wish to be treated. “The Golden Rule is the key to the success of the firm,” founder and CEO [Isadore] Sharp emphasized, “and it’s

appreciated in every village, town, and city around the world.”14

While Sharp promotes the Golden Rule as a successful global HR tool at Four Seasons, BP’s manager of HR global operations for Europe considers the Golden Rule inappro- priate for his human resources management philosophy. He argues that managers and employees should not treat each other the way they themselves wish to be treated, but the way the other wishes to be treated.15 These two rather contrasting views show how companies can use different employee rela- tions philosophies in recognizing and responding successfully to global standardization and to local differences.

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Companies may not practise one of the above corporate strategies exclusively at any one time; rather, they might simultaneously implement the four strategies for different products at the same time. Of the three different IHRM approaches, it is not difficult to see that the adaptive approach has the highest external fit, the exportive approach has the highest internal fit, and the integrative approach has the maximum fit both internally and externally. The integrative approach is highly recommended, because, as mentioned above, both internal factors and external factors are important to success- fully implement corporate international strategies.

// KEY HR PRACTICES AND PROCESSES WITHIN AN INTERNATIONAL CONTEXT The global expansion of organizations particularly influences the management of their human resources. While during the economic crisis some Canadian companies announced cuttings of their expatriate assignments, in the 2013 Employee Relocation Policy Survey by the Canadian Employee Relocation Council the majority of Canadian companies expected the number of foreign assignments and relocations (including short- term, long-term and permanent relocations) to continue to increase.16

INTERNATIONAL ASSIGNMENTS When considering workforce planning from an international perspective, the country of origin of the employee becomes a new category to consider in the demand and supply equation. When organizations begin operations in a new country, they typically staff the strategic jobs with expatriate employees, and fill out the remaining jobs with a blend of temporary home- country workers and permanent host-country workers. For example, when Life Time Athletic moved into the Canadian market from the United States, it did so incrementally by opening just a few locations in Canada, and by bringing many of its long-term U.S. employees to teach fitness classes, run programs, and perform administrative duties in its facilities. Life Time gradually increased the number of locally hired employees over the course of several years, beginning with the jobs that are more easily trained, and ending with the jobs that are more strategic to the success of the company and that have greater responsibility to cus- tomers. By doing so, Life Time was able to ensure that the company culture had a chance to take root in the new location, while also minimizing its dependence on the local supply of talent. If the host country is not able to supply adequate numbers of job applicants with the requisite skills, the success of the international expansion can be threatened. A major telecom company learned this lesson when it expanded into Hungary, only to learn that it was unable to hire the required number of skilled employees to fulfil its operational needs.17 This human capital planning failure forced the company to retreat from Hungary.

PURPOSES OF INTERNATIONAL ASSIGNMENTS International assignments that involve placing home-country nationals in the host country for a period of time may be put into place for a variety of reasons. In general, there are two categories of international assignments identified in the literature:18

1. Strategic control. This category of assignment is intended to retain the culture, structure, and decision processes of the home-country firm.

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2. Transfer of knowledge and skills. As described earlier in the Life Time Fitness example, the firm uses this type of assignment to bring necessary skills to the host-country firm.

The research on expatriate assignments demonstrates that the costs associated with long-term expatriate assignments can be significant, not only in terms of financial costs to the organization, but also in terms of career and family costs to the employee.19 While it is possible to view an extended international assignment as a career develop- ment opportunity, employees considering this type of assignment must carefully weigh the benefits to the costs to other family members, such as the spouse’s career, or the children’s education and social environment. The firm must also have systems in place to ensure a career path for those who embark on lengthy international assignments.

TYPES OF INTERNATIONAL ASSIGNMENTS Partly because of the costs and risks associated with long-term international assignments to employees and organizations, many different forms of international assignments have emerged, based on the duration of time spent away from the home country. The fol- lowing types of arrangements represent a continuum that ranges from frequent visitors to the host-country location to becoming a permanent employee in the host location.

FREQUENT FLYERS

This type of assignment is for the employee who takes more than the occasional busi- ness trip. While the employee may make frequent trips to the host country, he or she does not relocate to that country.20

INTERNATIONAL COMMUTERS

International commuters work in the host country, but continue to live in the home country.21 Rather than uprooting the entire family, these commuters travel on a weekly or multi-day basis, and travel home for the weekend or for longer periods of time off work. Frequent flyers and international commuters comprise a substantial portion of international travellers. In France, for example, just 5 percent of the population travels roughly 50 percent of the distance travelled by the entire French population.22 While society tends to glamorize frequent long-distance travellers by admiring their extended networks and cultural savvy, this type of travel comes with its own set of consequences ranging from jet lag to fewer opportunities for physical exercise and a healthy diet, to an increased sense of isolation and loneliness.23

SHORT-TERM ASSIGNMENT

This type of assignment describes any relocation assignment lasting less than a year.24 The employee lives in the host country, and may or may not bring her or his family for the duration of the assignment.

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EXPATRIATE ASSIGNMENT

This is one of the more familiar forms of international assignment, where the employee is relocated for a period of time usually in excess of a year.25 Because of the long-term nature of the assignment, employees are usually accompanied by their spouse and children, and plan to work in the host country for three to five years. These types of long-term assignments are becoming less popular, as companies appear to be replacing assignments lasting more than one year with shorter-term assignments lasting six months or less.26

PERMANENT TRANSFER

The final type of international assignment is when the employee is permanently moved from the home country to the host country.27

When planning for the demand and supply of employees for global operations, organizations must balance the costs with the strategic requirement for home-country employees to be present in the new location, as well as the duration over which to situate employees in the new location. Long-term assignments can become much more costly to the organization than short-term assignments or local hires. The HR function must also consider the local supply of human capital when expanding internationally, as the costs associated with relocating an adequate supply of skilled human capital may become prohibitive. In the next section, we will examine the factors that are involved in understanding issues of human capital demand and supply in a global context.

// INTERNATIONAL HUMAN CAPITAL DEMAND AND SUPPLY Workforce planning in an international context is not all that different from planning in a local context. Planners must forecast the demand for human capital as well as the supply of human capital, calculate the gap, and put HR practices in place to ensure that the firm has an adequate supply of human capital to operate. The international context adds complexities in the areas of understanding the environment, issues of demand and supply that are different from the local setting, and the integration of expatriate assignments to the supply question. For example, when looking at the environment, we know from studying strategic analysis that we look at the political, economic, social, legal, and regulatory issues that may be relevant to the business. These environmental aspects must be taken into account in the international context because they could have significant impact on the way jobs must be structured or how employee time may be used. This influences not just the supply of human capital in the host country, but also potentially the demand for human capital, as it may not be possible to structure a job in the host country as it would be structured in the home country. HR Planning Today 11.3 shows how one company deals with the challenges associated with demand and supply in an international context.

Forecasting the demand for labour in an international setting presents unique chal- lenges. The first major challenge is to develop an understanding of the labour market. Labour market data may be difficult or impossible to obtain, or the labour market

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HR PLANNING TODAY 11.3

INTERNATIONAL PLANNING AT FLEET COMPLETE

Fleet Complete is a Canadian-based global company that is in the business of connecting vehicles or other business assets within a centralized information hub. Fleet Complete makes the hardware and software that allows compa- nies to centrally monitor and connect all their delivery or service vehicles so that the firm can collect data on the location and trajectory of its vehicles, driving behaviours, and ultimately even the repair and maintenance status of the vehicles. It is a fast-growing company in an industry that is expanding globally and changing rapidly due to changes in technology.

Fleet Complete has roughly 500 employees world- wide, with 250 employees in Canada. The business oper- ates in Canada, the United States, and Mexico, as well as in Australia, Germany, Austria, and the Scandinavian and Baltic countries. Fleet Complete follows two methods of expanding internationally: through the acquisition of com- panies operating in its industry, and through greenfield expansion, where Fleet Complete builds its own local oper- ations from the ground up. Larry Indovina, EVP HR at Fleet Complete, acknowledges that human capital is its most important resource, and so the human capital component is the single most important operational requirement when expanding into a new country. The company places human capital at the forefront of its global expansion planning in different ways depending on the method of expansion.

When expanding through acquisitions, Fleet Complete sends its senior HR representative to the host country to interview employees in the firm that it is considering acquiring. These interviews span the hierarchy of the firm, from the CEO to senior management, to line managers, and line workers. The purpose of these interviews is not only to assess whether the firm has the requisite human capital to perform the necessary post-acquisition tasks, but also to discover what the firm is doing well, and what it can improve. Interviews provide Fleet Complete with a local perspective on issues relating to the competitive market to local employment standards and regulations, and the extent to which the existing human capital matches its needs.

Greenfield expansion for Fleet Complete involves setting up business from an organic perspective, in an area where business partners are already operating or where a business opportunity presents itself in an existing market. The company takes advantage of its social net- works to establish its human capital demand and supply. For example, when moving into Germany, Fleet Complete partnered with Deutsche Telekom, and then partnered with a recruiter who used to work at Deutsche Telekom to assist in the local hiring of the initial sales force. The recruiter worked in the industry and was well aware of the needs of both Fleet Complete and its telecom partner, and so was in a good position to understand their supply needs. As the sales force created a demand for Fleet Complete’s business, the HR demand grew organically, and the supply channels were in place to provide the needed levels of human capital.

To date, the lessons for Fleet Complete in determining its human capital demand and supply when growing inter- nationally include the following:

1. Make use of social networks. 2. Build trust within your networks and with employees.

3. Listen to local partners and potential acquisitions. They probably know more than you do about the local market, its political and regulatory environment, and the culture.

4. Pay attention to culture. Even when partners agree, there may be differences in what buy-in to a project looks like in terms of processes and outcomes. Under- standing the source of potential differences can build higher levels of consensus around objectives, leading to much more efficient use of human capital.

5. Keep communicating. Developing a presence in a new market involves a high degree of risk and uncertainty. As situations change, differences in assumptions and expectations emerge. It is extremely important to keep all parties informed.

Source: Based on an Interview with Larry Indovina, EVP HR, Fleet Complete (January, 2018).

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data that is available might have sources of error that make it difficult to interpret. For example, job titles might not be consistent within the data, or might encompass a larger variety of job types than the category implies, which can lead to significant underestimates or over estimates of available workers. Employment statistics produced by local governments might be based on assumptions that are not clear or obvious. These unfamiliar sources of information can lead to conclusions about the availability of workers with the necessary skills that could be wildly inaccurate.

When expanding into an existing market, a firm often joins an existing supply chain that brings value to its customers. For example, a cell phone maker that wishes to move into a country in which it currently does not have any business will need to create its own retail and marketing network, or join an existing retail network. It will also need to partner with an existing telecom provider to be able to connect its products to a cellular network. In this case, the cellular network provider is a supplier in the value chain, and if the firm decides to partner with an existing retailer, the retailer will be a buyer in the value chain. For a company moving into a new country, it will have to ensure that its value chain partners have the human capital necessary to do what the firm requires in order to fulfil its value proposition to its customers. In order to ensure that partner firms have the necessary human capital, and to avoid any shocks relating to inaccurate or incorrectly interpreted local labour market data, it is extremely impor- tant for companies to make use of trusted partners in the area, such as companies that they have already dealt with, and to visit the locale to develop an understanding of the environment and local labour market.

The Conference Board of Canada has identified four major areas of focus for workforce planning in an international context: understanding and interpreting local labour market data, issues relating to external human capital demand and supply, the environment, and flexible labour practices.28

1. LABOUR MARKET DATA With the proliferation of data and its increased availability, it is tempting for planners to make inferences about foreign labour markets by seeking out data sources to confirm whether or not the local labour market can support the firm’s operational needs. Orga- nizations such as Gapminder and the International Labour Organization that collect data and make it available to consumers for little or no cost can be incredibly valuable resources. Many governments also collect and report labour market information. The Canadian Government collects data about the Canadian workforce in general and pro- duces reports that relate to labour supply and demand broken down by industry, job skill levels, age categories, identified groups, and many other attributes of the workforce that may be relevant to employers. For more detailed analyses, the Federal Government produces the National Occupation Classification, which is a listing of jobs, analyzed using Functional Job Analysis, that contains the major duties and tasks of most of the benchmark jobs that comprise the Canadian economy. Governments produce these types of analyses to help foreign and domestic businesses, as well as the countries’ citizens to understand where issues of demand and supply are leading to gaps or surpluses, and to make policies to ensure a strong labour market.

A reliance on foreign government labour statistics can be problematic for business planning, as the assumptions around how data is collected, what jobs are included in job categories, what skills levels represent in terms of applicable skills, or other grouping assumptions that could lead to costly mistakes in forecast estimates of human capital

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demand or supply. Governments may also be interested in encouraging foreign invest- ment, and may therefore be biased toward presenting their country’s labour market to the rest of the world in the most favourable manner possible. As a result, the safest strategy for making determinations about foreign labour markets is to use several sources of information, examine the assumptions used to compile the data, make use of trusted networks that have experience in the foreign market, and send a company representative to get first-hand experience with the industry and the labour pool.

2. EXTERNAL HUMAN CAPITAL DEMAND AND SUPPLY Assumptions made about the labour market can mean the difference between busi- ness success and failure. If a company assumes that it can access adequate numbers of employees with certain technical skills, but finds that those skills are not actually available in the location that the company decides to place its offices, it might have to incur unexpected costs to help draw applicants from further afield. It might even be the case that the necessary technical skills are simply not available in the new location. Some of the manufacturing firms in Mississauga, Ontario, found that it was becoming increasingly difficult to find job applicants, and that many of the applicants who wished to work at the firms were coming from the nearby city of Brampton. However, public transit between Brampton and Mississauga was not at all convenient, and these com- panies began running shuttle buses to facilitate transit. These sorts of issues can present unexpected and significant problems in an international context. Some of these issues can be addressed through an expatriate strategy, where the firm brings in the necessary human capital, and those employees train newly hired local employees and model the firm’s desired culture. The mix of home and host-country employees will be determined by the balance between the strategic needs of the firm, the availability of host-country human capital, and the costs associated with providing home-country employees when host-country human capital is not available.

3. THE ENVIRONMENT Deciding where to locate a business in a foreign country is determined by the availability of the necessary resources and the proximity to customers. Because labour is often 40 percent to 80 percent of a firm’s operating costs, it is one of the largest resources to consider in this decision. The tools used to perform strategic analysis come in useful for this type of decision as well. The PESTDL analysis is a variation of SWOT (see Chapter 1), in which planners consider the strengths, weakness, opportunities, and threats that are presented to the organization through the local political, economic, social, technological, demographic, and legal/regulatory environment, and how these environmental issues can affect how the management of human capital may be different between the home country and the host country.

4. FLEXIBLE LABOUR STRATEGIES Flexible labour strategies include the types of working relationships that the firm can have with its employees, such as telecommuting, flexible work hours, job sharing, part- time, contract, and other arrangements. These types of strategies can provide increased

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work opportunities to job applicants who may not be able to take on full-time, centrally located employment. These arrangements also provide the firm with increased operating leverage by allowing the firm to shed some of its labour force when revenues are lower, and increase the size of its labour force when revenues are higher. Local labour regula- tions and customs can have an impact on the types of flexible arrangements that firms can make use of, and so the full range of possible local options should be explored and understood before incorporating them into HR practices.

// INTERNATIONAL RECRUITMENT AND SELECTION RECRUITMENT In the domestic context, one of the key strategic decisions in recruitment is internal recruitment versus external recruitment. This two-option decision has a three-option parallel in the international domain and includes recruitment opportunities such as home-country nationals (HCNs), parent-country nationals (PCNs), and third-country nationals (TCNs). HCNs are individuals from the subsidiary country who know the foreign cultural environment well. PCNs are individuals from headquarters who are highly familiar with the firm’s products and services, as well as with its corporate culture. TCNs are individuals from a third country who have intensive international experience and know the corporate culture from previous working experience with the corporate branches in the third country.

Home-country nationals (HCNs) Individuals from the subsidiary country who know the foreign cul- tural environment well Parent-country nationals (PCNs) Individuals from head- quarters who are highly familiar with the firm’s products and services, as well as with its cor- porate culture Third-country nationals (TCNs) Individuals from a third country who have intensive international experience and know the corporate culture from previous working experience with corpo- rate branches in a third country

Parent country nationals may be unfamiliar with the cultural norms of the host country.

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While each recruitment option has its strategic advantages and disadvantages (see HR Planning Notebook 11.1), it is crucial that any staffing decisions be based on the MNC’s short- and long-term strategies and follow best recruitment practices. The latter include the development of a job analysis to identify job specifications and provide the basis for job descriptions.

Each specific assignment might have different job descriptions and require different knowledge, skills, and abilities (KSAOs). However, general KSAOs are also required to carry out these assignments in a foreign context. Caligiuri and Di Santo’s29 empirical

HR PLANNING NOTEBOOK 11.1

STRATEGIC ADVANTAGES AND DISADVANTAGES OF KEY RECRUITMENT OPTIONS

ADVANTAGES DISADVANTAGES SIHRM

PCNs • Well versed in company’s needs and norms

• Potential unfamiliarity with the cultural norms of the host country (including norms of supervision)

• Possible blocking of HCNs’ career progression within the firm

• Considerable costs of relocating abroad

Strong exportive SHRM approach

HCNs • Familiarity with the host-country culture

• Limited familiarity with firm’s own operations

• PCNs at headquarters may lack sufficient understanding of the subsidiary’s needs, and corporate strategy for the subsidiary may suffer as a result

Strong adaptive SHRM approach

TCNs • Greater familiarity with the host- country culture than PCNs (if, that is, the TCNs come from a proximal nation) but loyalty will be to the firm (rather than to the host country per se)

• Relocation costs lower than for PCNs • Enhanced career development

opportunities by allowing employees from the various subsidiaries to move to other subsidiaries

• Improved understanding of the subsidiaries’ needs by the corpora- tion and vice versa through greater interaction between TCNs positioned in regional or corporate headquarters and PCNs

• Some cross-cultural preparation may still be required

• Potentially suffering from a lack of knowledge of the corporate culture

• Use of TCNs is often part of a strategy that entails the use of employees from many nationalities (including HCNs and PCNs), increasing the overhead for expatriate relocation across the entire firm considerably

• Using TCNs to the exclusion of HCNs may create the same problem of blocked career advancement that occurs when PCNs are used in this manner

Mixture of exportive and adoptive SIHRM approach

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study identified a list of abilities, knowledge, and personality characteristics essential for global managers with different positions in diverse cultures.

Once the international assignment needs have been identified and the appropriate recruitment pool has been chosen, the right candidates must be selected.

SELECTION Selecting the right candidates for global assignments is crucial for the long-term success of both the MNC and the individual managers. While companies may wish to invest in better selection and preparation of their expatriates, surveys show a different picture (see HR Planning Today 11.4).

Many factors relating to successful cross-cultural adjustment have been identi- fied in the literature, including cultural knowledge, stress-management skills, conflict resolution skills, communication skills, and cognitive flexibility.30 Several authors have simplified the above lengthy list into the following three dimensions of cross-cultural competencies:31

• Self-maintenance competencies, which refer to the capability to substitute sources of reinforcement when necessary and deal with alienation and isolation

• Relationship competencies, which refer to the capability to develop and maintain relationships with home-country nationals (HCNs)

HR PLANNING TODAY 11.4

INTERNATIONAL SELECTION AND PREPARATION

Many companies responding to the 2012 Global Relocation Trends Survey planned to invest in better selecting and preparing their managers for their foreign assignments and beyond. However, only 20 percent of respondents use formal selection tools. Among the international assignees, those most likely to be sent on assignment were male (80 per- cent), aged 40–49 (34 percent), and married (60 percent). Less than half (43 percent) had children accompanying them, an all-time low.

According to the report, about 80 percent of com- panies provided cross-cultural preparation and only 28 percent had a career management program for their assignees.

The key challenges facing companies were managing costs and finding the right employee. According to the 2013 Employee Mobility Survey (conducted in 24 countries

with 13 000 respondents) only 2 in 10 people, in general, would move to a new country for employment purposes. But 24 percent of employees working for companies would move. Employees would be more likely to accept an inter- national assignment if the employer would offer

• A guaranteed job at the end of the assignment • Airline tickets for family vacations

• A paid trip to visit the country before the assignment

• Immigration assistance for their partner

And the top reasons for failed assignments (about 7 percent of assignees return early, not completing the assignment) continue to be family issues and the employ- ability of the spouse.

Source: Brookfield GRS, “The 2012 Global Relocation Trends Survey,” http://espritgloballearning.com/wp-content/uploads/2011/03/2012- Brookfield-Global-Relocations-Trends-Survey.pdf. Retrieved November 17, 2014. https://c.ymcdn.com/sites/www.cerc.ca/resource/resmgr/ research/employee_mobility_survey_rep.pdf, retrieved November 23, 2014.

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• Perceptual competencies, which refer to the capacity to understand why for- eigners behave the way they do, to make correct attributions about the reasons or causes of HCNs’ behaviour, and to correct those attributions when they prove incorrect

Selecting candidates on the basis of their true potential, using the above criteria, means choosing global managers for their personality, trainability, interpersonal skills, and attitudes, regardless of whether they are PCNs, HCNs, or TCNs. A capable global manager should be able to work in different countries to successfully implement his or her headquarters’ strategies. This is usually the integrative approach, which seeks, for the most part, to place the best-qualified person in the position, regardless of the nationality of that person. In order to select the best person, managers should start by identifying the best potential global managers, then put them through training and help them develop their global careers.

// PRE-ASSIGNMENT TRAINING The well-being of these expatriates and their families in the local country depends largely on how well they were prepared for the global assignment. Cross-cultural training for global managers and their accompanying relatives plays a crucial role in this pre-assignment process. Studies have consistently found that cross-cultural training positively influences expatriate self-development, interpersonal skills, and cross-cultural perception. Training was also found to have a major impact on the adjustment and effectiveness of expatriate managers.32 Researchers have been calling for firms to conduct more formalized CCT for years.33 However, in reality, many firms still fail to heed this call.34

Aside from the economic pressures and challenges, reasons for the limited invest- ment in CCT could be a lack of coordination with HR planning activities. Many firms select their expatriates too quickly, which precludes a lengthy training process. According to the Canadian Employee Relocation Council (CERC)’s 2011 employee relocation policy survey, only one-third of the survey’s responding companies give

more than two months’ notice of an impending assignment.35 Because of the improper usage of expatriate training, many companies have not benefited from the training.36

Strategic HR planning is needed for training in order to meet the goals of career devel- opment for global managers and to focus on the develop- ment of global competencies as defined previously. Ptak et al. interviewed professionals who were experienced in expatriate training and asked them to sug- gest some useful guidelines for overseas training.37

Cross-cultural and language training increases assignment success.

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The researchers found that effective training should emphasize five points:

1. Assess and evaluate the needs of training for expatriates. 2. Clarify the purpose and goals of training that are relevant and applicable to

participants’ daily activities. 3. Plan and design the training programs to meet training goals. 4. Implement the training plan. 5. Use several techniques to increase the effectiveness of training programs.

HR Planning Notebook 11.2 outlines four steps for guiding the effective training.

HR PLANNING NOTEBOOK 11.2

GUIDELINES FOR EFFECTIVE TRAINING

Training planning: Assess and evaluate the needs of training for every selected potential global manager. Clarify the purpose and goals of training that are relevant and applicable to global managers’ daily activities. Plan and design the training programs to meet training goals.

Training contents: Training can cover many areas depending on the needs of individual managers, ranging from technical training and managerial training to interpersonal skills training and cultural training. Typically, cultural training involves the following aspects: (1) area studies programs that include environmental briefings and cultural orientations; (2) culture assimilators—essentially multiple-choice ques- tions about cultural characteristics; (3) language training; (4) sensitivity training (which could include role-playing exer- cises and behavioural modelling videos designed to raise awareness of cultural differences in behaviour); and (5) field experiences, such as visits to the restaurants of the target nationality or actual visits to the host country itself. These cultural training activities are not only useful for the global managers but also helpful for their spouses and children.

Training approaches: Several training approaches have been used in reality, ranging from (1) an information- giving approach (such as lecture-based area briefings), to (2) behavioural modelling videos or case studies that offer vicarious learning, to (3) the most experiential forms (e.g., training based on role-playing and immersion in the form of field experiences). These three methods should be

encompassed in the training plan according to the training needs. An information-giving approach will increase the knowledge competency of the global managers; the other two approaches will increase the trainees’ other skills, such as interpersonal and analytical skills. All methods will be effective if they are planned properly to meet the training needs of the global managers, but the experiential methods are usually considered more “rigorous” (i.e., as having a greater degree of trainee involvement).

Treating the international assignment as on-the- job training: Global experience has been found to be the best way to help employees gain global competence. For example, Warner-Lambert has its Global Leadership Associ- ates Program (GLAP), which is designed to rotate potential global managers through various foreign Warner-Lambert businesses. By gaining experience in different cultures and functions, these managers will acquire the skills, ability, and knowledge to lead anywhere in the world. This requires, however, mentoring at the host-country site by, for example, other expatriates at the host-country site or by HCNs. More- over, to fully regard the international assignment as part of a long-term career development process, a plan must be in place for the expatriate’s return to the home country (presuming, that is, that the PCN is to remain a PCN or to become a TCN). This, unfortunately, is where a lot of organizations fall short, and it has led to what has become known as the “repatriation issue.”

Sources: R.L. Tung, “Selecting and Training of Personnel for Overseas Assignments,” Columbia Journal of World Business, Vol. 16 (1981): 68–78; S. Black and M.E. Mendenhall, “Cross-Cultural Training Effectiveness: A Review and a Theoretical Framework for Future Research,” Academy of Management Review, Vol. 15, No. 1 (1990): 113–136; R.L. Tung, “Selection and Training Procedures of U.S., European, and Japanese Multinationals,” California Management Review, Vol. 25, No. 1 (1982): 57–71; P. Caligiuri and V. Di Santo, “Global Competence: What Is It, and Can It Be Developed Through Global Assignments?” Human Resource Planning, Vol. 24, No. 3 (2001): 27–35; and J.P. Katz and D.M. Seifer, “It’s a Different World Out There: Planning for Expatriate Success Through Selection, Pre-Departure Training, and On-Site Socialization,” Human Resources Planning, Vol. 19, No. 2 (1996): 32–47.

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// POST-ASSIGNMENT ACTIVITIES REPATRIATION Repatriation usually means that the PCNs, TCNs, or even HCNs (working in head- quarters as part of a career development plan) finish their overseas assignment and come back to their home headquarters or home subsidiaries. It is somehow expected that one will encounter culture shock when moving to another country; however, that one might experience culture shock upon return from abroad is usually not considered. Yet research38 indicates that the cross-cultural adjustment process is not just a U-curve process (i.e., the high of the post-arrival honeymoon, the low of the cultural shock experience, and the eventual regained high of adjustment and mastery), but rather a W-curve process, with the last “V” of the “W” happening in the form of reverse culture shock on return to the home country.39

It has been argued that reverse culture shock upon repatriation leads to several serious consequences for the employee and the organization; for example:

• Prior to the return home, the employee may become anxious at the thought of having no appropriate position to return to; this anxiety can affect produc- tivity abroad and work adjustment shortly after repatriation.40

• The employee may become dissatisfied with his or her standard of living upon return, having become accustomed to the special status that accompanied the expatriate position.41

• Co-workers may not be interested in hearing about the repatriate’s experiences; lots of things have gone on in their own lives over the last few years, and they’ve had their own preoccupations and focus.42

• The repatriate’s job may not make as much use of internationally acquired KSAOs as it could.43 In this case, “out of sight, out of mind” is the operative phrase.44

Despite the negative consequences of not having well-developed repatriation pro- cesses for their international assignees, companies continue to pay little attention to the return of their expatriate employees. (See HR Planning Today 11.5.)

Repatriation The process of PCNs, TCNs, or even HCNs returning to their home headquarters or home subsidiaries

HR PLANNING TODAY 11.5

ONCE ABROAD, ALWAYS ABROAD?

According to surveys, about 25 percent of repatriates left the company within the first year. Explanations for repa- triate turnover included:

• “Most expatriates leave to pursue other expatriate assignments that they view as beneficial to their careers.”

• “Expatriates anticipate a lack of attractive posi- tions to return to in the home country and seek out

better opportunities outside their company”. Indeed three months after returning to their home country, one-third of repatriates were still in temporary positions, and of those who had a job, 75 percent felt it was a demotion.

These findings have been confirmed by a study by CIGNA International Expatriate Benefits, the National For- eign Trade Council (NFTC), and WorldatWork, suggesting

(Continued )

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Clearly, a career development plan for global managers will minimize these negative consequences; the MNC can also make the most of the repatriate’s internationally devel- oped KSAOs by treating them as candidates for global managers. The career planning for repatriates will also let the soon-to-be-repatriated individual have a clearer idea of what’s in store, which will go a long way toward minimizing these negative consequences.

CAREER DEVELOPMENT Two issues are of great importance for the long-term career development of global managers. The first is to regard the international assignment as merely one step in an overall career development plan. The second is to ensure that the next step (i.e., the candidate’s subsequent assignment) makes good use of the KSAOs developed internationally, as these will serve as a source of competitive advantage to the firm. There are a number of ways to incorporate KSAOs acquired internationally into the repatriates’ subsequent career development. The repatriate could serve as a mentor or formal trainer to future expatriates or provide input into the CCT process by recounting critical incidents experienced abroad. Alternatively (or as well), the repa- triate can apply his or her understanding of the subordinate’s needs by eventually serving as a long-distance supervisor to other expatriates. HR Planning Today 11.6 provides anecdotal evidence of how consideration of the repatriation issue proved to be effective for Colgate-Palmolive.

Another option is for the expatriate not to be repatriated but instead to join the pool of global managers and remain an international employee for the duration of his or her career, rotating from subsidiary to subsidiary, as outlined in HR Planning Today 11.7.

that a major problem of repatriation was the employees’ status upon return and the lack of commitment to have a job for the employees upon their return.

Considering the financial and nonfinancial resources (e.g., training and development) companies invest in their international assignees, it comes as a big surprise that companies do not keep track of expatriate attrition rates and, indirectly, their return of investment. Losing international assignees because of a lack of employment or career opportunities in home-country operations is not only a great monetary loss but also, most significantly, a nonmonetary loss (knowledge and skills transfer, management development, relationship and network building, and so on), and might also have a negative impact on other candidates for overseas assignments.

It is important for HR professionals to have arranged with the expatriate prior to his departure clear career objectives, and to communicate with the expatriate on a regular basis while he or she is on assignment to discuss any potential career path changes, and to better prepare him or her and the family for a potential reverse culture shock upon their return home. As mentioned earlier, it seems that for many companies the support and prepa- ration for an international assignee stops with his or her departure to the host country. Yet, as we can see from the study results above, company and HR responsibili- ties for an expatriate need to be more comprehensive, including all stages of an international assignment—in particular, the repatriation of the employee and his or her family.

Sources: http://www.iorworld.com/leveraging-your-talent-investment-through-repatriation-pages-271.php, retrieved March 13, 2018; GMAC-Global Relocation Services, U.S. National Foreign Trade Council and SHRM Global Forum, Global Relocation Trends 2002 Survey Report (2002); 2004 Survey Report; and 2006 Survey Report. These reports are available from the GMAC Global Relocation Services website, www.gmacglobalrelocation.com/ survey.html, and J. Handel, “Out of Sight, Out of Mind,” Workspan (June 2001): 54–58.

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HR PLANNING TODAY 11.6

AN EFFECTIVE REPATRIATION POLICY

Colgate-Palmolive Co. recognized the wealth of informa- tion it already had on expatriate skills—in a system not originally designed for that purpose. Coleen Smith, New York–based vice-president for global people development, says that the company began putting together a global succession-planning database almost 10 years ago. “It has taken a variety of forms over the years,” she says. While Colgate-Palmolive’s database is primarily for suc- cession planning, it also contains data on each manager’s experience with or awareness of particular cultures. The information is made available throughout the company’s worldwide network. “Senior leaders,” Smith says, “have come to expect a certain level of information, which we really manage through our global succession-planning database.”

The example of Colgate-Palmolive shows how a comprehensive global HR information system (HRIS) can

support multinational enterprises and their expatriates in making international assignments more successful. Including a manager’s experience with or awareness of particular cultures in the HRIS can help companies to make more informative decisions in the selection of the right candidate for the overseas appointment. A global HRIS could also help companies to develop and communicate effectively clear and long-term career objectives and paths for its global managers, and better plan and prepare an expatriate’s repatriation in terms of creating and providing appropriate employment opportunities that are in line with the returning manager’s career objectives. While initially costly in their development, the long-term benefits of such HRIS should not be underestimated—in particular when considering the many failed expatriate assignments and heavy financial and nonfinancial losses associated with such failures.

Source: Originally published in R. O’Connor, “Plug the Expat Knowledge Drain,” HR Magazine (October 2002), 101–107. Society for Human Resource Management, Alexandria, VA. Used with permission. All rights reserved.

HR PLANNING TODAY 11.7

INTERNATIONAL RELOCATION ACTIVITIES AND POLICIES OF COMPANIES OPERATING IN CANADA

The Canadian Employee Relocation Council (CERC) conducts surveys of employee relocation policies and practices of organizations with operations in Canada. The 2013 survey confirmed that Canadian businesses remain very active in the global marketplace, with almost 50 percent relocating employees internationally. Of these companies, 27 percent expect short-term international relocations to increase over the next 12 months, and 31 percent of respondent companies anticipate that

long-term international transfers will increase over the same period.

The key organizational challenges for successfully relocating international assignees include family con- cerns, tax implications, and housing. The average cost of a permanent relocation for a homeowner is reported at $125,000. Most employers offer cost of living allowances, as well as other benefits such as language training and tuition for the children.

Source: Canadian Employee Relocation Council, 2013 Employee Relocation Policy Survey, July 2013, http://c.ymcdn.com/sites/www.cerc.ca/ resource/resmgr/Research/2013_Policy_Survey_Executive.pdf, retrieved November 22, 2014.

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// LABOUR RELATIONS Knowledge of the types of unions that exist in a country (i.e., the union structure) and the rate of unionization in that country can be critical to international HR managers. This is because union activities can influence the HR practices that may be implemented and how implementation may proceed.

At least four types of unions can be identified:45 industrial, craft, conglomerate, and general. Industrial unions represent all grades of employees in an industry; craft unions are based on skilled occupations across industries; conglomerate unions repre- sent members in more than one industry; and general unions are open to all employees in the country. This diversity of types of unions can be found to varying extents in different countries.46 For example, Canada’s union structure is industrial, craft, and conglomerate. In the United States, all four types of union structures exist, and it has white-collar unions as well. Germany’s union structure is primarily industrial and white- collar, and Norway’s is both industrial and craft. Japan’s union structure consists of company unions, which operate within the enterprise and have the employees of this enterprise as its members.

In addition to the diversity in types of unions, nations vary in their rates of unionization. In 2013, the U.S. unionization rate was at 10.8 percent; Japan’s rate was 17.8 percent, Germany’s was 17.7 percent, and Canada’s was 27 percent. Some of the highest rates of unionization exist in Scandinavian countries such as Sweden (68 percent) and Denmark (67 percent).47 There is a global trend of union density decrease, and the reasons are manifold and often region-bound. For North America as a whole, the declining union density throughout the past decades has been caused by

The rate of unionization varies greatly between countries.

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“institutional weakness (absence of sectoral employers’ associations and comprehen- sive wage bargaining structures), [and] decentralization and fragmentation of union organizations and industrial relations.”48 The reasons for Canada’s higher union density in comparison to the United States have been “the larger size of the public sector in Canada … and the more positive public sentiment towards unionisation.”49

Awareness of practical differences in labour relations, while laudable, is by itself insufficient. International HR managers need to translate this awareness into practice. Labour relations activities can constrain MNCs’ abilities to influence wage levels (per- haps even to the extent that labour costs become non-competitive).50 Such activities may also limit the ability of MNCs to vary employment levels at will, and may hinder or prevent global integration of the operations of the MNC.51

Accordingly, international HR managers have to devise strategies to improve the fit between their labour relations activities and the external environment. Strategic compen- sation might be limited in countries with strong governmental or union wage interfer- ence. Firms operating in such countries may need to find other ways of maintaining low costs. Staffing may be affected in countries that limit the firm’s ability to implement redundancy programs.52 In such countries, worker retraining may be important because of the economic necessity to cross-train and retain workers to adapt to environmental and technological changes affecting the firm rather than lay off workers.53 In short, the presence of unions need not be disastrous for the international firm; rather, the wise international HR manager will simply learn the constraints posed by the local union conditions and devise an effective strategy to plan accordingly.

// SUMMARY This chapter has addressed many of the strategic issues and decisions that have to be taken into consideration in the context of managing employees internationally. Organi- zations seeking to expand their businesses globally would do well to do the following: first, recognize the strategic decision issues inherent in managing the HR function in an international context; second, strive to make these decisions in ways that take into account their firm’s strategic objectives and recognize the added complexity that the international context brings; and third, arrange the continuous career development of global managers starting from the point of expatriate selection, followed by ongoing training and career arrangement after repatriation. Overall, SIHRM practices and issues should be implemented in line with the firm’s strategy.

KEY TERMS adaptive IHRM approach p. 291 domestic strategy p. 291 exportive IHRM approach p. 291 global strategy p. 292 home-country nationals (HCNs) p. 299 integrative IHRM approach p. 292 multidomestic strategy p. 291 multinational strategy p. 291 parent-country nationals (PCNs) p. 299

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repatriation p. 304 strategic international HR planning p. 290 strategic international HRM p. 291 third-country nationals (TCNs) p. 299

DISCUSSION QUESTIONS 1. Discuss with your family and/or friends all the reasons that might motivate you

to accept an international assignment, and the reasons that would cause you to reject one. Compare your lists to those published in surveys (cited in this chapter). What incentives could an employer offer to encourage you to accept the assignment?

2. This chapter describes three stages that companies go through as they seek to expand internationally. Describe these stages, their corresponding strategies, and the HR implications of each strategy.

3. In this chapter we have discussed different forms of industrial relations. However, some countries where Canadian manufacturers outsource much work, such as Bangladesh, have no unions. Discuss the advantages and disadvantages of out- sourcing manufacturing to a heavily unionized environment such as Denmark, compared to Bangladesh.

4. This chapter introduces four major areas of focus for international workforce plan- ning. Discuss how planners might deal with each of these issues prior to finalizing a decision to operate in a foreign market.

EXERCISES 1. The global business environment has been hit by a number of regional events,

such as terrorism and Ebola, that have had profound implications for the global and local strategies of MNCs. Select a recent world event, identify the specific HR implications that might arise from it, and devise policies as to how these may be handled.

2. Despite its widely illustrated importance for preparing expatriates and their fami- lies for international assignments, little is done for immigrant families arriving in Canada through their own efforts. In your group, identify two or three students who have immigrated as teenagers or young adults. Interview them and then, as a group, discuss which cross-cultural aspects you would include in a CCT training program, how these aspects can be operationalized, and what kind of training methods you’d use.

3. Ask an employer for an interview with one of the company’s expatriates who has recently returned home or arrange for a phone interview with an expatriate cur- rently on an international assignment. Discuss his or her experiences, and how he or she was prepared and supported by the company during the different stages of an international assignment. How do the interviewee’s views differ from the studies and findings discussed in this chapter? Why?

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CASE STUDY DANGEROUS ASSIGNMENTS

On June 24, 1998, Edward Leonard, of Creston, BC, a diamond driller working for Terramundo Drilling, was kidnapped by members of the Revolutionary Armed Forces of Colombia (FARC) in northeastern Colombia. Leonard’s captors wanted to negotiate a deal for gold mining shares with Greystar Resources., a gold mining company from Vancouver and the owner of claims in Colombia’s Santander prov- ince for which Terramundo and Leonard were contracted to drill core samples.

Leonard’s boss, Terramundo’s Norbert Reinhart, wanted to purchase his employ- ee’s freedom by paying $100 000 to the FARC guerrillas. On October 6, 1998, in a meeting with the guerrillas, Reinhart and the ransom money were exchanged with Leonard. While Reinhart was hoping to walk away with Leonard after the money exchange, the FARC realized that Reinhart was the president of Terramundo and thought that in him they had an even better hostage. After 94 days of captivity, and complex negotiations between the FARC, local contacts, and Canadian gov- ernmental and company officials, Reinhart was released on January 8, 1999.

The case shows the dangers of frontier mining (which has had a strong tradi- tion in Canada) and illustrates some of the potential challenges for employees on international assignments. At the same time, the case has started a strong debate about the responsibilities of companies operating in industries and geographic regions dangerous to their employees, and the necessity for precautious actions and support structures protecting international assignees. (In the same year in which Reinhart was taken hostage, more than 2100 people were kidnapped in Colombia, including at least 43 foreigners.)

Source: T. Fennell and S. Timmins, “Homecoming for a Hero,” Maclean’s (January 25, Vol.112, Issue 4, p.26–29, 1999).

QUESTIONS 1. Was it the right decision in the first place for Terramundo to operate

in a region well known for being controlled by FARC guerrillas, and in which kidnapping was a very common way to fund FARC activities?

2. Did Reinhart do the right thing to get involved in the way described and help his employee? What were Reinhart’s alternatives and options?

3. What can companies operating in industries such as the mining or oil business do to protect their international assignees? What should be the role of the HRM function?

4. When sending your employees into remote and dangerous geographic regions, should all employees (i.e., both home- and host-country employees) get the same employment support and workplace safety and security support? Does reality reflect your response?

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// REFERENCES 1. United Nations Conference on Trade and Development. 2010. World

Investment Report 2014, http://unctad.org/en/PublicationsLibrary/ wir2014_ overview_en.pdf_en.pdf. Retrieved November 20, 2014.

2. Beckett, D. 2011, February 21. “Why Kidnap and Ransom Insurance?” http://thecanadianexpat.com/index.php/2011/02/21/why-kidnap-ransom- insurance. Retrieved June 20, 2011.

3. For a list of Canadian governmental representatives in different countries, go to http://www.voyage.gc.ca/contact/offices-list_liste-bureaux-eng.asp.

4. Cuthill, S. 2000. “Managing HR Across International Borders.” Compensation and Benefits Management, Vol. 16, No. 3: 43–45.

5. Kirby, J. 2001. “Reinvention with Respect.” Harvard Business Review, November: 117.

6. Ferner, A. 1997. “Country of Origin Effects and HRM in Multinational Companies.” Human Resource Management Journal, Vol. 7, No. 1: 19–37; Rosenzweig, P.M., and N. Nohria. 1994. “Influences on Human Resource Management Practices in Multinational Corporations.” Journal of International Business Studies, Vol. 25: 229–251. http://www.ups.com/content/ca/en/ about/facts/worldwide.html. Retrieved November 19, 2014.

7. Ferner, A. 1997. “Country of Origin Effects and HRM in Multinational Companies.” Human Resource Management Journal, Vol. 7, No. 1: 19–37; Rosenzweig and Nohria. 1994.

8. Taylor, S., S. Beechler, and N. Napier. 1996. “Toward an Integrative Model of Strategic International Human Resource Management.” Academy of Management Journals, Vol. 21, No. 4: 959–985.

9. Dowling, P., M. Festing, and A. Engle. 2008. International Human Resources Management: Managing People in a Multinational Context. London, UK: Thomson Learning.

10. Rosenzweig and Nohria. 1994. 11. Harvey, M., C. Speier, and M.M. Novicevic. 2001. “Strategic Human

Resource Staffing of Foreign Subsidiaries.” Research and Practice in Human Resource Management, Vol. 9, No. 2: 27–56.

12. Bonache, J. 2000. “The International Transfer of an Idea Suggestion System.” International Studies of Management and Organization, Vol. 29, No. 4: 24–44.

13. Beechler, S., and J. Yang. 1994. “The Transfer of Japanese-Style Management to American Subsidiaries: Contingencies, Constraints, and Competencies.” Journal of International Business Studies, Vol. 25: 467–491; Bonache. 2000.

14. Hallowell, R., D. Bowen, and C.I. Knoop. 2003. “Four Seasons Goes to Paris: 53 Properties, 24 Countries, 1 Philosophy.” Harvard Business School, January 8.

15. Presentation by Michael Schmidt, Manager of HR Global Operations Europe, keynote speaker at the Bertelsmann Stiftung Conference. 2008. Synergie durch Vielfalt, Berlin, Germany.

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16. Canadian Employee Relocation Council. http://c.ymcdn.com/sites/www .cerc.ca/resource/resmgr/Research/2013_Policy_Survey_Executive.pdf. Retrieved November 18, 2014.

17. Young, M. 2012. Strategic Workforce Planning Across National Borders. The Conference Board of Canada.

18. Bartlett, C., and P. Beamish. 2011. Transnational Management: Text, Cases, and Readings in Cross Border Management, (6th ed.). Burr Ridge, IL: McGraw-Hill/ Irwin.

19. Prerera, H., E. Chew, and I. Nielsen. 2017. “A Psychological Contract Perspective of Expatriate Failure. Human Resource Management, 56(3): 479–499.

20. Mayerhofer, H., L. Hartmann, G. Michelitsch-Riedl, and I. Killnger. 2004. “Flexpatriate Assignments: A Neglected Issue in Global Staffing.” International Journal of Human Resource Management, Vol. 15, No. 8: 1371–1389.

21. Ibid. 22. Cohen, S., and S. Gossling. 2015. “A Darker Side of Hypermobility.”

Environment and Planning, Vol. 47: 1661–1679. 23. Ibid. 24. Mayerhofer, Hartmann, Michelitsch-Riedl, and Killnger. 2004. 25. Ibid. 26. https://www.eca-international.com/insights/articles/may-2016/the-decline-

of-the-traditional-expat. Retrieved March 13, 2018; Stevens, M. 2010. “Overseas Assignments Up, Costs Down.” People Management (September 30): 8.

27. Meyskens, M., M. Von Glinow, W.B. Werther, Jr., and L. Clarke, L. 2009. “The Paradox of International Talent: Alternative Forms of International Assignments.” International Journal of Human Resource Management, Vol. 20, No. 6: 1439–1450.

28. Young, M. 2012. Strategic Workforce Planning Across National Borders. The Conference Board of Canada.

29. Caligiuri, P., and V. Di Santo. 2001. “Global Competence: What Is It, and Can It Be Developed Through Global Assignments?” Human Resource Planning, Vol. 24, No. 3: 27–35.

30. Mendenhall, M., and G. Oddou. 1985. “The Dimensions of Expatriate Acculturation.” Academy of Management Review, Vol. 10: 39–47; Walton, S.J. 1990. “Stress Management Training for Overseas Effectiveness.” International Journal of Intercultural Relations, Vol. 14: 507–527; Black, J.S., and M. Mendenhall. 1990. “Cross-Cultural Training Effectiveness: A Review and a Theoretical Framework for Future Research.” Academy of Management Review, Vol. 15, No. 1: 113–136; Abe, H., and R.L. Wiseman. 1983. “A Cross-Cultural Confirmation of the Dimensions of Intercultural Effectiveness.” International Journal of Intercultural Relations, Vol. 7: 53–67; Parker, B., and G.M. McEvoy. 1993. “Initial Examination of a Model of Intercultural Adjustment.” International Journal of Intercultural Relations, Vol. 17: 355–379.

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31. For example, Black, J.S., and M. Mendenhall. 1991. “The U-Curve Adjust- ment Hypothesis Revisited: A Review and Theoretical Framework.” Journal of International Business Studies, 2nd Quarter: 225–247; Mendenhall and Oddou. 1985.

32. For example, GMAC Global Relocation Services, National Foreign Trade Council, and the SHRM. 2004. “Global Forum Global Relocation Trends 2003/2004 Survey Report.” http://www.nftc.org/default/hr/GRTS% 202003-4.pdf. Retrieved September 4, 2008; and Gröschl et al. 2008.

33. Feldman, D. 1989. “Relocation Practices.” Personnel, Vol. 66, No. 11: 22–25; McEnery, J., and G. Des Harnais. 1990. “Culture Shock.” Training and Development Journal, Vol. 44, No. 4: 43–47.

34. Brookfield GRS. 2012. “The 2012 Global Relocation Trends Survey.” http:// knowledge.brookfieldgrs.com/content/insights_ideas-grts. Retrieved June 25, 2011.

35. Canadian Employee Relocation Council. 2011. “CERC Relocation Trends Survey 2011.” http://www.cerc.ca/LinkClick.aspx?fileticket=Y7rfVwX9bUg% 3d&tabid=135. Retrieved July 11, 2011.

36. Black, S., and H.B. Gregersen. 1991. “When Yankee Comes Home: Factors Related to Expatriate and Spouse Repatriation Adjustment.” Journal of International Business Studies, Vol. 22, No. 4: 671–694; Thomas, D.C. 1998. “The Expatriate Experience: A Critical Review and Synthesis.” Advances in International Comparative Management, Vol. 12: 237–273; Tung, R.L. 1981. “Selecting and Training of Personnel for Overseas Assignments.” Columbia Journal of World Business, Vol. 16: 68–78.

37. Ptak, C.L., J. Cooper, and R. Brislin. 1995. “Cross Cultural Training Programs: Advice and Insights from Experienced Trainers.” International Journal of Intercultural Relations, Vol. 19, No. 3: 425–453.

38. For example, see Lazarova, M., and P. Caligiuri. 2001. “Retaining Repatri- ates: The Role of Organizational Support Practices.” Journal of World Business, Vol. 36, No. 4, 389–401; Suutari, V., and C. Brewster. 2003. “Repatriation: Empirical Evidence from a Longitudinal Study of Careers and Expecta- tions Among Finnish Expatriates.” International Journal of Human Resource Management, Vol. 14, No. 7: 1132–1151.

39. Black and Mendenhall. 1991; see also Gröschl et al. 2008. 40. Black and Gregersen. 1991. 41. Ibid. 42. Harvey, M.G. 1982. “The Other Side of Foreign Assignments: Dealing with

the Repatriation Dilemma.” Columbia Journal of World Business, Vol. 17, No. 1: 52–59.

43. Beck, J.E. 1988. “Expatriate Management Development: Realizing the Learning Potential of the Overseas Assignment.” In F. Hoy, ed., Best Papers Proceedings, Academy of Management 48th Annual Meeting, August 1988. Anaheim, CA: 112–116; Tung. 1988.

44. Handel, J. 2001. “Out of Sight, Out of Mind.” Workspan, June: 54–58. 45. Gröschl et al. 2008.

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46. Katz, J.P., and S.W. Elsea. 1997. “A Framework for Assessing International Labor Relations: What Every HR Manager Needs to Know.” Human Resource Planning, Vol. 20, No. 4: 16–25.

47. OECD. “Trade Union Density.” http://stats.oecd.org/Index. aspx?DataSetCode=UN_DEN. Retrieved November 23, 2014.

48. Visser, J. 2006. “Union Membership Statistics in 24 Countries.” Monthly Labor Review Online, Vol. 129, No. 1. http://www.bls.gov/opub/mlr/2006/01/ art3full.pdf. Retrieved September 23, 2008.

49. Visser. 2006. 50. Gröschl et al. 2008. 51. Ibid. 52. Katz and Elsea. 1997. 53. Ibid.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand the various types of mergers and acquisitions. • Explain why organizations merge and the methods used to achieve a merger. • Identify the financial and human impacts of mergers. • Describe the issues involved in blending cultures. • Discuss how a merger affects HR planning, selection, compensation,

performance appraisal, training and development, and labour relations.

MERGERS AND ACQUISITIONS

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// MERGERS AND ACQUISITIONS Mergers and acquisitions (M&As) play a critical part in a corporation’s survival, growth, and profit strategies. Many great companies were built on a track record of mergers and acquisitions; they include GE, Thomson, Alcan, and Power Financial. A new record for mergers and acquisitions was set in 20152; therefore, HR professionals should add the ability to manage a merger as part of their skill set.3

One in three employees will experience a merger or acquisition during the course of their working lives and about one-quarter of Canadian CEOs are planning a merger or acquisition.4 Organizations are increasingly focused on M&A as a growth strategy, but sellers are reluctant, as valuations continue to rise and economic conditions improve.5 About one-half are typically domestic deals—Canadian companies buying Canadian com- panies.6 But in the world of mergers and acquisitions, Canadian companies are more often the prey, not the hunters. Foreign companies have acquired Canadian companies, such as HBC, Canada’s oldest organization, and our natural resource companies, such as Inco, the mining giant based in Sudbury. Henry Mintzberg, Canada’s management guru, suggests that Canadians are less aggressive, being seen more as northern mice, rather than northern tigers. The result of this takeover activity is that we end up with shells, which means less work for head office specialists in advertising, law, financial services, and human resources.7

There are concerns about foreign takeovers that go beyond the loss of head office jobs, and this issue is discussed in HR Planning Today 12.1.

Before we embark on a discussion of the motives for mergers, readers are encour- aged to become familiar with the terms used to describe them.

// DEFINITIONS A merger is a consolidation of two organizations into a single organization.8 Within mergers, there are three categories:

• A horizontal merger is the merging of two competitors, which combine to increase market power. These mergers typically are subject to review by regula- tors who fear monopoly power in the marketplace. HR Planning Today 12.2 describes a merger of two big competitors.

Horizontal merger The merging of two competitors

In 2006, Rogers Communications, a Canadian communications and media company, bought 93 retail stores in order to inte- grate them with the company’s existing Rogers Video and Fido stores, with the goal of providing a one-stop retail experience. Combined under one brand, Rogers Retail, the new operation would be among the 10!largest retail chains in Canada.

Francois Chevallier, vice-president of retail systems for Rogers Retail, had four months to assure the successful inte- gration of these stores into Rogers’ culture and operations. The first step was to put together the transition team, and the two most important functional experts were the IT expert and the HR expert. The immediate HR task was to hire 9 managers

and 500 employers. The HR expert had to devise strategies to retain key employees, particularly the retail supervisors who tend to leave soon in the New Year, after receiving their year-end bonuses. As Francois noted, “The amount of com- munication involved in a transition like this is staggering.” To cope with the deluge of email, Rogers set up an intranet site, which sent email advisories alerting employees to updates. After employees were hired, the training could not begin until the new operating systems were chosen and the new busi- ness rules for small stores were developed. Francois is very satisfied with the acquisition: “Just three months after the transition, the new stores are our best performers.”1

BIG IS BEAUTIFUL

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HR PLANNING TODAY 12.1

ISSUE: FOREIGN OWNERSHIP OF CANADIAN COMPANIES

One in five Canadian companies has a foreign owner. Critics of foreign ownership posit a number of reasons against foreigners controlling Canadian-based companies. They argue that CEOs based in Canada will make decisions that help the Canadian economy, such as keeping R&D in Canada, as well as other specialists in HR, marketing, law, etc. Profits will remain in Canada. Canadian companies will use Canadian suppliers, while foreign-owned ones will trust the relationships they have with suppliers in their home country.

However, the facts do not support all these allega- tions. Foreign firms that took over Canadian companies created as many jobs as they eliminated. They also created more head office jobs than Canadian firms during the same period. However, there is strong public opinion that foreign ownership should be restricted in certain sectors such as banking, telecommunications, and culture. Recently, the government blocked a deal by a foreign company to acquire Potash Inc., one of the first times the regulators have protected a natural resource.

Source: Adapted from Prasad, S. 2006. “The urge to merge,” The Toronto Star, August, 6, 2009, p. 12.

HR PLANNING TODAY 12.2

A ROUGH RIDE

One merger that attracted a great deal of attention was the multibillion-dollar merger of Chrysler and Daimler-Benz. There are always problems merging two cultures, but this merger posed additional problems because the rivals were also from two different countries. Behaviours based in national differences are very difficult to identify and describe. For example, the Daimler-Benz German culture is strong on formality, which the Americans judged as brutal and harsh, whereas to the Germans it meant respect. Likewise, the Germans saw the American informal or casual way of doing

business as “goofy” and “acting like a game show host.” Added to this mix were the two fiercely competitive organiza- tion cultures with each “rival” trying to establish who was best at what. In the end, the merger did not work. After a decade of problems and billions of dollars lost, Daimler-Benz sold the ailing Chrysler division for a fraction of what the company had paid for it. Observers think that Daimler-Benz was so preoccupied with the Chrysler problems that its lack of attention to the Mercedes division caused it to lose its status as the number-one luxury car in the world.

Sources: L. Jack, “Oh Lord, Won’t You Buy Me,” Marketing Week, May 22, 2008, p. 2; and D. Brown, “Everything’s Fine, and Then!.!.!.,” Canadian HR Reporter, October 22, 2001, p. 1.

• A vertical merger occurs when a buyer and a seller (or supplier) merge to achieve the synergies of controlling all factors affecting a company’s success, from the production of raw goods to manufacturing to distribution and retail sales. A real estate agency might merge with a real estate developer, for example.

• A conglomerate merger occurs when one company merges with another but the two companies have no competitive or buyer–seller relationship. In other words,

Conglomerate merger The merger of two organizations competing in different markets

Vertical merger The merger of a buyer and a seller or supplier

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they are in different businesses competing in different markets. Although Tata, the largest, most successful conglomerate (primarily a motor company) in India, achieved most growth organically, the company did buy VSNL (an international telecommunications company) to enter the telecommunications business.

An acquisition is the purchase of an entire company or a controlling interest in it. The purchase of Shoppers Drug Mart by Loblaws is a public example.

A consolidation occurs when two or more companies join together and form an entirely new company. In this case, the assets and liabilities of both companies are taken on by the third company, usually after the original ones are dissolved. Burroughs and Sperry, two computer manufacturers, consolidated to form UNISYS. Three hospitals in Toronto—York Finch, Humber Memorial, and Northwestern General—merged in response to budget cutbacks.

A takeover occurs when one company seeks to acquire another company. Usually, this term denotes a hostile transaction, but it can mean a friendly merger as well. A hos- tile takeover involves acquisition of a company against the wishes of its management. ClubLink, known for operating 18-hole golf courses, was the target of a hostile takeover bid from Tri-White Corp. The ClubLink management team campaigned successfully to win the support and votes of more than 50 percent of the outstanding shareholders, and the bid was unsuccessful.

For the purposes of this chapter, M&As will be treated as one category, that of two or more companies joining together. The next section examines three motives for merging.

// THE URGE TO MERGE Companies merge for three reasons: strategic benefits, financial benefits, and/or the needs of the CEO or managing team.

STRATEGIC BENEFITS Companies that have growth as a strategic objective can expand in many ways: lever- aging current customers, opening new markets internationally, corporate venturing, and M&As. The first three are slower methods. Acquisitions of companies in different regions or serving different markets are much quicker than internal expansion. Compaq and HP both sell computers but target two different markets: home offices and home entertainment customers. Their merger created more sales than two single brands.

Another strategic rationale that can be achieved through mergers and acquisitions is the strengthening of competitive position. Pfizer, a pharmaceutical company, took over its competitor, Warner-Lambert, in order to obtain the powerful cholesterol drug Lipitor. Companies may want to acquire competencies that make their core competency less imitable.9

Companies may acquire or merge with others to achieve complementarities. Dif- ferent types of synergies can be achieved through M&As. (Synergy, a term taken from the physical sciences, refers to the type of reactions that occur when two substances or factors combine to produce a greater effect together than would result from the sum of the two operating independently. More simply stated, synergy can be described as a state in which two plus two equals five.) Operating synergy, which usually is referred to as economies of scale (decreases in per-unit costs), is the cost reduction produced by

Consolidation The joining of two or more organizations to form a new organization Takeover One company acquiring another company

Operating synergy The cost reductions achieved by economies of scales produced by a merger or acquisition

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NEL 319CHAPTER 12 Mergers and Acquisitions

a corporate combination. Compaq and HP can renegotiate contracts with suppliers for memory chips and hard drives to save a total of $3 billion annually.10 The merger of Inco and Falconbridge resulted in savings of $350 million achieved through synergies.11 These gains are achieved by the spreading of overhead, the increased specialization of labour and management, and the more efficient use of capital equipment. Closely related to the economies-of-scale benefit is the economy-of-scope advantage: the ability of a firm to use one set of inputs to produce a wider range of products and services.12 Banks, for example, like to use their bank tellers (now called “financial consultants”) to do not only banking but also mortgage financing, car loans, and so on. Another type of synergy may occur when the acquiring firm believes that it can manage the target firm better and could increase its value. For example, a small firm may benefit significantly by using the larger firm’s distribution networks and experienced management. It is important that the majority of anticipated synergies be identified and captured in the first year of the deal to ensure success.13

Companies may merge to gain access to new markets. For example, Canada’s two satellite radio businesses, XM and SIRUS Canada, merged in 2011, a deal that qua- drupled XM’s revenue and customer base.14

Diversification may be another strategic motive. A company may wish to reduce its dependency on a market that is cyclical in nature to capitalize on excess plant or employee capacity. For example, a ski resort might acquire a golf course in order to fill its hotel rooms and restaurants during the stagnant summer months. General Electric pursued this diversification strategy; not wanting to depend entirely on electronics, the company became a diversified conglomerate by acquiring insurance businesses, television stations, plastics manufacturing businesses, credit card businesses, and so on over a 10-year period.

Companies may even wish to redefine their businesses through acquisitions. Nortel Networks made a series of acquisitions in the 1990s to move from being a supplier of

Loblaws hopes to be able to cross sell with its acquisition of Shoppers Drug Mart.

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switches for traditional voice networks to a supplier of technology for the Internet. Of course, this strategy is not always successful.

Companies may also wish to achieve the benefits associated with vertical integration and horizontal integration. Vertical integration refers to the mergers or acquisitions of companies that have a buyer–seller relationship. Such a move may ensure either a dependable source of supply or control over quality of the service or product. PepsiCo acquired KFC, Taco Bell, and Pizza Hut and thus ensured the distribution of its products in these restaurant outlets. (However, Coke then convinced Wendy’s and other fast-food chains that selling Pepsi in their outlets would indirectly benefit their competitors.15)

Horizontal integration refers to the increase in market share and market power that results from M&As of rivals. Western Canada’s BC Telecom and TELUS merged to become a stronger regional telephone company that was better able to compete against Bell Canada’s launch of a new national company. When acquisitions are impractical for organizations (perhaps because target companies are not for sale or too expensive) firms might turn to strategic alliances. For example, Cisco Systems is an active acquirer of small firms, but also engages in R&D alliances with Intel and other technology giants.16

FINANCIAL BENEFITS Organizations look to M&As to achieve some financial advantages. The main reason is to reduce expenses by reducing headcount, factories, and/or branches. Other financial goals include the following:

• Organizations expect to reduce the variability of the cash flow of their own business. An organization lowers its risk by putting its “eggs in different bas- kets.” However, a counterargument suggests that executives cannot manage unrelated businesses and must focus on and protect the core business from competitive and environmental pressures. The suggested wisdom is to put eggs in similar baskets.17

• Organizations expect to use funds generated by their own mature (or cash cow) businesses to fund growing businesses. However, some experts argue that the advantages of using one division to fund another division might be risky in the long run. Labelling one business in the portfolio a “cash cow” and another a “star” has negative effects. Employees in the “mature” business might feel neglected, as resources are poured into the star, and may reduce those employees’ commitment to production and innovation. Management might misjudge which businesses have potential for market share increases and which do not. For example, most industry observers viewed the piano market as having slow or no growth. However, Yamaha saw the industry quite differ- ently: it looked worldwide for market share, saying, “Anyway, we are not in the piano business, we are in the keyboard business.”18 Sometimes slow-growth, highly competitive industries offer stable (not risky) returns.

• There may be tax advantages to the takeover, which vary by country. Considerable tax losses in the acquired firm may offset the income of a parent company.

• It is expensive to enter new markets and to develop new products. Acquisi- tions result in more rapid market entries than internal innovation and product development do. They provide speedy access to new markets and to new

Horizontal integration The merger or acquisition of rivals

Vertical integration The merger or acquisition of two organizations that have a buyer–seller relationship

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NEL 321CHAPTER 12 Mergers and Acquisitions

capabilities, as exemplified by pharmaceutical companies that purchase bio- technology companies for their scientists and patents.19

• Astute corporations may analyze the financial statements of a company and decide that the company is undervalued. By acquiring the company, and some- times by merging it with the administration already in place, a company can achieve financial gains. However, the success of the valuation-driven acquisi- tion depends on timing economic cycles.

The overriding goal is to increase the shareholders’ wealth.

MANAGEMENT NEEDS Some argue that corporate life is a game, and managers love to play it. The theory here is that managers seek to acquire firms for their own personal motives, and economic gains are not the primary consideration.20 This hypothesis might help explain why some firms pay questionably high premiums for their takeover targets.

One theory examines the “incentives” or payoffs to the CEOs if they engage in acquisition behaviour. Managers may pursue their personal interests at the expense of stockholders. For example, there is a positive correlation between the size of the firm and management compensation, and so CEOs can expect higher salaries for managing larger firms.21 Other, more indirect incentives might include the prestige or status of owning larger firms or companies in fashionable sectors, such as entertainment or sports.

Another perspective examines the unconscious motives of CEOs. Robert Campeau’s takeover of Allied Stores and Federated Department Stores has been subject to “arm- chair” analysis because he overpaid for his acquisitions and ultimately went bankrupt servicing the debt. Speculation on his motives ranges from the simple need to prove himself to complex theories espoused by psychoanalysts. But does the research support the theory that managers make decisions based on Freudian or unconscious motivators?

Most of the work in this area analyzes the role that a manager’s unconscious desires or neuroses play in formulating corporate strategy or decision making.22 Some research is based on the intensive analyses used by therapists to explore motives. A few studies attempt to link personality characteristics, such as the need for power, with growth strate- gies.23 One study found that the greater the ego of the acquiring company’s CEO—as reflected in the CEO’s relative compensation and the amount of media attention given to that CEO—the higher the premium the company is likely to pay.24 However, few studies arrived at helpful conclusions that would explain the behaviour of executives.

MERGER METHODS How do companies merge? The process, in a friendly environment, is relatively simple. The management of one company contacts the management of the target company. Sometimes an intermediary is used, such as an investment banker or, in smaller firms, a colleague who makes an introduction. During the first tentative talks, the boards of direc- tors are kept informed of the procedures, and ultimately, they approve the merger. Friendly deals can be completed quickly. Hostile takeovers become dramatic, with management pushing for poison pills and seeking white knights to protect themselves. The term poison pills refers to the right of key players to purchase shares in the company at a discount—around 50 percent—that makes the takeover extremely expensive. “White knights” are buyers who

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will be more acceptable to the targeted company. There is even a “Pac-Man” defensive manoeuvre, by which the targeted company makes a counteroffer for the bidding firm.

THE SUCCESS RATE OF MERGERS There are many examples of failed acquisitions and mergers. Microsoft wrote off 96 percent of the value of the acquired Nokia; Google unloaded the Motorola handset business for about 25 percent of what it had paid; News Corp sold MySpace for $35 million, after paying $580 million to acquire it 11 years earlier.25 How do we define merger success? In publicly owned companies, the goal would be to increase shareholder value 1 5(2 2 5). In private companies, the goal would be to increase ROI (return on invested capital). Many studies have established that only about 15 percent achieve the financial goals that were envisioned.26 Acquisitions of related businesses fare better than acquisitions of businesses unrelated to the parent business.27 The novice M&A management team does as poorly as the experienced team. Why? Perhaps because every merger is different, with different synergies and cultures.

Not only is the merged firm at risk, but also the subsidiaries. There is some indica- tion that a merger occupies so much management time, attention, and other resources that the original businesses are neglected. Executives of HP and Compaq spent more than one million person-hours planning for the integration.28 There are enormous chal- lenges in joining two companies. The problems include integrating computer systems, eliminating duplication, re-evaluating supplier relationships, reassuring clients, advising employees, and reconfiguring work routines.

The success rate may also vary by sector and by size. The manufacturing sector, for example, differs from the service sector. In the manufacturing sector, much more is fixed, with capital investments already made, with technology controlling processes, and with lower job skills. The service sector, in contrast, relies on social-control mecha- nisms, which are highly subject to culture management. As such, the risk is greater with acquisitions in the service sector.

Size appears to influence success rates. A large firm can absorb a small firm in a rela- tively inconsequential fashion. The merger of two large firms generates more problems.

FINANCIAL IMPACT For many reasons, the financial returns are rarely those that were envisioned. Acqui- sitions, on average, resulted in increases of 25 percent for the target firms, and zero economic profits for the bidding firms.29 Sometimes, a premium price was paid, and the company is unable to service the debt or recover the investment. At other times, the forecasted economies of scale or complementarities are not achieved. The market may have changed, resulting in revised forecasts.

During the merger of two healthcare facilities in the United States, chaos was cre- ated in the resulting company by the collapsing of 525 branches into 350, the attempt to standardize the two facilities’ computer systems, the termination of a tenth of the workforce, an attempt at a second acquisition, and the need to defend the company against a barrage of lawsuits.30 The result was that outstanding bills jumped 30 percent in one year, payment times increased from 109 days to 131 days, earnings were down sub- stantially, revenues were less than those of previous years, and the stock price dropped.

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NEL 323CHAPTER 12 Mergers and Acquisitions

Overall, studies by consulting company McKinsey & Co. report that only 23 percent of mergers end up recovering the costs incurred in the deal, and about half of those analyzed by the American Management Association resulted in profit reductions.31 Four out of five failed to produce any shareholder value and over half destroyed value.32 Most devastating of all for merger maniacs was the analysis that demonstrated that non-acquiring companies (i.e., those that made no acquisitions) outperformed acquiring companies on Standard & Poor’s industry indices.

Many mergers fail because the buyer overextends itself financially.33 The buyer bor- rows heavily and then must engage in cost cutting to service the debt. Assets are spun off, employee numbers are reduced, and the new company is left in financial shambles.

Even if the overall financial picture of the merged company appears rosy, there are indications that different functional areas suffer. For example, a firm that has to use cash to pay for the debt incurred in acquiring another business now has less to spend on certain projects that can be postponed, such as research and development.

An overall summary of the reasons for failures is provided in HR Planning Notebook 12.1.

HR PLANNING NOTEBOOK 12.1

REASONS FOR FAILURES OF M&AS

• Integration difficulties • Inadequate evaluation of target • Large or extraordinary debt • Inability to achieve synergy • Too much diversification

• Managers overly focused on acquisitions • Too large an acquisition • Difficult to integrate different organization cultures • Reduced employee morale due to layoffs and

relocations

The specialists in post-integration mergers at PricewaterhouseCoopers have conducted research that compares the goals of mergers to their success rates (see HR Planning Notebook 12.2). As you will note, most of the studies of mergers have examined U.S. mergers. One of the few studies to examine the mergers of Canadian companies shows a different trend. From an analysis of all mergers between 1994 and 2000, two Canadian academics concluded that there are positive and significant returns to shareholders, in contrast to American studies, which show negative or insignifi- cant returns. Why? One explanation is that Canadian capital markets, industries, and companies are much smaller.34 However, there are some winners, namely the merger advisers. The Campeau–Federated Department Stores deal alone generated approximately US$500 million in fees for M&A advisory firms.35

While experts easily list the reasons for failures of M&As, the methods to achieve success are harder to prescribe. Roger Martin, former Dean of the Rotman School of Business in Toronto, attempts to do so and his thoughts are summarized in HR Planning Notebook 12.3.

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HR PLANNING NOTEBOOK 12.3

MAKING AN ACQUISITION SUCCESSFUL

The key is for the company that is buying another company to bring something to the deal that will make the acquisi- tion more competitive such as:

• Being a smarter provider of growth capital. Tata Group fund smaller companies and grow success- fully this way.

• Providing better managerial oversight. GE Cap- ital applied its better management systems

to improve the profits of Burger King and Tim Horton’s.

• Transferring valuable skills. PepsiCola transferred its direct store delivery logistics system to make Frito Lay (an acquired company) more successful.

• Sharing valuable capabilities. Proctor & Gamble shared its customer team capability and media buying capability with their acquisitions.

Source: Martin, R. 2016, “M&A: the one thing you need to get right,” Harvard Business Review, June 2016, pp. 42–48.

IMPACT ON HUMAN RESOURCES The real costs of a merger may be hidden—that is, not evident when analyzing financial records. Takeovers result in human displacement, and the cost of losing the best sales rep, who either is anxious about his or her job or does not wish to work for the acquired company, cannot be measured in accounting terms. The time involved in replacing this employee with a new one represents a cost to the employer. Research has shown that

HR PLANNING NOTEBOOK 12.2

GOALS OF MERGERS AND ACHIEVEMENT RATES

Source: K. Frers and A. Chadha. 2000, “Why You Can’t Create a Purple-Footed Booby,” Canadian HR Reporter (November 20), p. 16. Reprinted by permission of Canadian HR Reporter. © Copyright Thomson Reuters Canada Ltd.

GOALS RATIONALE FOR DEAL (%) RATE OF ACHIEVEMENT (%)

Access to new markets 76 74

Growth in market share 74 60

Access to new products 54 72

Access to management/tech talent 47 51

Enhanced reputation 46 48

Reduction in operating expenses 46 39

Access to distribution channels 38 60

Access to new technologies 26 63

Reduction in number of competitors 26 80

Access to new brands 25 92

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that M&As cause increases in insecurity among employees, lower levels of satisfaction at work, less affective commitment, and a loss of trust in the firm and its top managers. This is particularly true in hostile acquisitions.36

Another study showed that nearly half of the senior executives in large acquisitions leave within a year of the takeover, and 75 percent leave within three years.37 Add to this the thousands of jobs that are lost in the restructuring or downsizing of the merged companies. That is a national effect. The organizational effects are that it takes from 6 to 18 months for an organization to assimilate the results of an M&A, and the productivity loss is estimated to be 15 percent.38 The loss of employee productivity stems from many sources:

• Employees go underground, afraid to make themselves visible or do anything that may put their jobs at risk.

• Overt sabotage occurs when employees deeply resent the turmoil the merger is causing in their lives.

• Self-interested survival tactics emerge, including hiding information from team members to accumulate a degree of power (the employee feels that he or she is “the only one who really knows how things work around here”).

• A resigned attitude appears, stemming from the belief that no amount of work will prevent one from being fired.39

• Employees spend at least one hour a day dealing with rumours and misinfor- mation, and/or engaging in job-search activities.40

But the real cost is to the thousands of employees who lose their jobs. Those who survive are affected in different ways; most experience stress and anxiety, with a resultant loss of productivity.

To summarize, the feeling among those experienced in M&As is that, while mergers are forged for strategic and finan- cial reasons, they succeed or fail for human reasons. Experts estimate that employee issues are responsible for the failure of one-third to one-half of mergers.41 These issues include the difficulty in blending cultures, reduction in service levels, poor motivation, loss of key people and clients, and loss of focus on longer-term objectives.42

The next section examines what many consider to be the greatest challenge of M&As—the blending of corporate cultures.

// CULTURAL ISSUES IN MERGERS In an effort to increase the probability that the merger will work, many managers are turning to the principal reason they fail: the meshing of cultures. The friendly merger of TransCanada Pipelines and Nova Corp. has been described as “GI Joe meets the Care Bears.”43 The nearly US$10 billion merger of Nortel and Bay Networks met with skepticism about its possible success, principally because of a predicted clash between the cultures of a traditional telephone equipment manufacturer with a brash upstart newcomer.44

After a merger, restructuring including the termination of employees often occurs.

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Culture is the set of important beliefs that members of an organization share. These beliefs are often unspoken and are shaped by a group’s shared history and experience. Culture can be thought of as the “social glue” that binds individuals together and cre- ates organizational cohesiveness.45 Cultures, growing slowly over time, are not easy to describe, and employees are often aware of their corporate culture only when they try to integrate with people from another organization with a different one.

It is estimated that mismanagement of the culture is responsible for as much as 85 percent of all merger failures.46 The longevity of an organization’s culture cannot be underestimated. Canadian Airlines International was formed by merging about half a dozen different airlines. A decade after the merger, employees still referred to themselves as veterans of Wardair or Canadian Pacific Airlines—that is, they retained their original cultures. Integrating two cultures is a difficult process. Early on, the merger executives have to decide if one culture will be grafted onto that of the other, or if the two will merge to create a third culture.

In some cases, firms that are aware of the difficulties of merging cultures attempt to negotiate, in the form of a contract, many aspects in advance. The assignment of positions or the acceptance of a culture, such as one of empowerment, seems like good advance planning. But those who have been through this process liken it to a marriage. The couple might agree, in writing, on who will do the dishes and how many children they want, but the day-to-day living may be quite different, and the assumptions change over time. Recognizing this, some employees might choose to leave the corporation rather than endure the pain of culture mergers.

According to researchers, four options are open to those involved in M&As:47

• Cultural pluralism—the partners co-exist • Cultural integration—the partner organizations blend current cultures together • Cultural assimilation—one company (usually the acquirer) absorbs the other • Cultural transformation—the partner companies abandon key elements of their

current cultures and adopt new norms

Merging two cultures is difficult. How can a rule-bound, bureaucratic organization such as the Bank of Montreal merge with the “cowboys” of the brokerage firm Nesbitt Burns? To complicate this issue, the acquiring company typically wants to retain the entrepreneurial spirit of the target company and to infuse this spirit into its own troops. Instead, the entrepreneur is squashed by the rules and rigid decision making of the parent company. For example, Novell purchased WordPerfect (then owned by Corel) and managed to stifle the innovative talent it had bought.

The level of difficulty in merging two cultures is increased when the merger is one between companies from two different countries; that is, an international M&A. For example, Canadians tend to look to employee task forces and committees to provide input on decisions; people from other countries expect their managers to provide direc- tion. Mexicans want more structure and definition of roles and responsibilities than do Canadians. In one case, a merger was stalled because Mexicans needed this information but would not ask for it as it was seen as questioning management’s authority.48

The blending of cultures can take years. As in all organizational change programs, a process must be undertaken. The first step is to identify the differences, to ensure that employees are aware of the differences and can verbalize or label them. For example, GE begins a cultural assessment of acquisition candidates during the due diligence phase, using interviews, focus groups, and surveys. There are many cultural assessment tools— such as the Merging Cultures Evaluation Index—that enable companies to identify the

Culture The set of important beliefs that members of an organization share

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NEL 327CHAPTER 12 Mergers and Acquisitions

cultural fit between merged companies.49 Other companies use a cultural clarification activity in which each partner group responds to these three questions:

• How do we view our organization’s culture? • How do we view the other side’s culture? • How do we think the other side views our culture?50

The authors’ recommendation is to appoint a sprinter to deal with urgent matters. Likewise, we suggest that a team of “long-distance runners” be appointed to address broad issues of mission statements, the creation of culture to achieve the strategic goals, and similar matters. Part of their mandate would be to measure current attitudes, solicit opinions, and give the employees a voice in the process.

Here is an example of how this is done. Two hospitals that merged had very dif- ferent cultures, which did not blend. One had a culture of controlling employees; the other a culture of encouraging employees.51 The hospitals began the culture-blending process by conducting a comprehensive audit, using a paper-and-pencil diagnostic tool.

The results were terrible, and the only positive finding was that everyone wanted a change. Two teams were appointed, one to change the culture of both hospitals to a culture of employee development and the other to help form this new culture.

Sometimes, cultural characteristics common to both merging companies can be identified. For example, two very different firms found out that they both put top priority on customer service, and this common focal point became the link for their merger. Sometimes a superordinate goal can be created.

The formation of task forces or one-off projects has integration as a subgoal. As is the case when warring nations are forced to fight together against an alien force, the ways in which two corporate cultures are more similar than different are apparent when a superimposed goal becomes the catalyst. American Express uses this technique regu- larly. Managers from merging firms work together on projects to develop new products or services, for which the merged firms can claim ownership. Besides integration, such projects have other benefits: They develop in-house talent, provide an opportunity to solicit broad perspectives, and facilitate transfers as the project ends.52 General Mills used an integration team as part of a successful strategy in its acquisition of Pillsbury (see HR Planning Today 12.3). While all of this seems time consuming, it may, in fact, save time in the longer term. Organizational change experts realize that time spent ensuring employee buy-in will speed implementation. If time is not spent ensuring that employees are committed to the changes, employees will resist the changes.

HR PLANNING TODAY 12.3

HR SYSTEMS EFFECTIVE IN ACQUISITION

In 2001, General Mills acquired Pillsbury. The goal of General Mills was to double revenues, be a market leader in 14 food categories, and be in a position for international growth in every country in the world, through the dough business. Both companies were the best in their class, not only having brand icons like the Pillsbury Doughboy but also having won many awards for being best employers.

Conscious of the research that demonstrated that most acquisitions fail, the vice-president of HR set out to manage the process of integrating 10 500 General Mills employees with 16 000 Pillsbury employees.

The integration strategy started with a transition team who anticipated the fundamental concerns of employees: (1) Will I have a job in the new organization? (2) How do

(continued )

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I!win? (i.e., how can I do my best and reap rewards?) and (3) Do I have a future here?

The transition team paid attention to three areas:

1. Develop the systems that mattered most to employees: rewards, performance management, and individual development.

2. Sequence the implementation of these systems at a pace that employees could absorb.

3. Use the climate survey to monitor employee feedback and concerns.

The acquisition was a success. During the first 12 months of the integration, turnover dropped to 5.4 percent from 9.9 percent (General Mills) and 17.8 percent (Pillsbury). The company was able to retain 98 percent of the top value creators. Although business results were dis- appointing in the first fiscal year, the following year sales increased by 32 percent, and net earnings doubled. These results are attributed directly to the integration strategy, and prove that HR systems can be key drivers of success in a merger or acquisition.

Another approach is to “seed” the company with experienced managers who “walk the talk” and can facilitate the adoption of the new culture. However, just transferring personnel from one company to another may only increase the differences between them and promote subcultures or cliques. “Living together” before the marriage may also help ease merger shock. Japanese companies usually have worked on a joint venture or a collaborative project, designed to assess cultural fit, before they acquire another company. Turf battles are a problem unless companies establish the new structure, including the reporting relationships, early in the merger process.

Consultants specializing in postmerger integration practices at Pricewaterhouse Coopers believe that two cultures cannot be merged by just waving the common-vision banner above the employees. They suggest these specific steps be undertaken:

• Deploy role models: Those in highly visible positions of authority should exem- plify the new and desired behaviours.

• Provide meaningful incentives: Shower the role models and employees who repli- cate the desired behaviours with quick and visible rewards.53

More radical measures may be necessary. Some companies force employees who are opposed to the merger or cannot adapt to the new culture into early retirement or some other exit option. However, this will result in knowledge loss for the organization. Researchers are recognizing that employees’ knowledge and abilities—the organization’s set of capabilities—might not appear on the balance sheet but are crucial to the success of an organization. The difficult part of the merger is to merge these intangible assets of two organizations.54

Often, the acquiring firm managers see themselves as conquering heroes, feeling that they have won and the acquired managers are losers. In one merger, this attitude caused 96 percent of valuable store managers of the acquired company to leave within six months of the acquisition.55 North American firms are the most likely to adopt a centralized, micromanagerial attitude to an acquisition, rather than an adoption of the best practices of both companies.56 An acquisition could be seen as a stimulus to review all HR practices, and to learn about both organizations. The cultural integration issues are described in HR Planning Today 12.4. The steps necessary to do a cultural audit or due diligence are outlined in HR Planning Notebook 12.4.

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HR PLANNING TODAY 12.4

THE BLENDING OF CULTURES: INTEGRATION OF PET VALU AND BOSLEY’S

Pet Valu opened its first store in 1976 when the owners invested in a small space to start a business distributing pet supplies. Over 35 years later, Pet Valu has become one of the largest players in the pet food and supply industry, with over 400 stores across Canada and the United States servicing thousands of customers. Its staff has grown to over 1300 employees.

Although the Toronto-based pet-supply retailer achieved some of its growth organically, the purchase of the company by private equity allowed it to significantly increase its ability to expand. In 2009, Roark Capital Group, a franchise-focused, private-equity firm, bought Pet Valu from its previous owners for a reported $144 million. Since the sale to Roark, Pet Valu has had more funds to dedicate to the renewal of the chain and growth.

A new goal of Pet Valu became nonorganic growth via acquisitions. Pet Valu was itself a new acquisition and, therefore, it was important to achieve the anticipated sales targets forecasted in order to rationalize the purchase by showing early returns to stakeholders. A more long-term goal of Pet Valu was to move into new markets and grow the business across Canada and the United States. In 2010, Pet Valu acquired Bosley’s Pet Food Plus, a smaller spe- cialty retailer chain of pet food and supplies with 23 stores across British Columbia. Bosley’s story was similar to Pet Valu’s: it had been in business for over 30 years with mainly corporate stores. The unique feature of Bosley’s was its focus on holistic and specialty brands in a market known as a leading-edge innovator of natural and holistic pet products. An attractive feature of Bosley’s was that “its stores typically had higher sales than comparable stores,” as Christine Martin Bevilacqua, vice-president of human resources, points out. However, post-acquisition, there were several integration challenges. For example, although Bosley’s had payroll employees, the company did not have a fully developed HR function. Christine describes the overall challenge:

Figuring out the balance between integration and letting them [Bosley’s] stand alone. Some places we wanted to integrate and some places we didn’t want to add bureaucracy.!.!.!.![Bosley’s] had a good brand, so we still wanted to foster

that entrepreneurial spirit and allow them to be successful in their market.

Ms. Martin Bevilacqua recalls the approach to integra- tion of the two businesses:

We treated them [Bosley’s] like a client; it wasn’t like they were acquired and now they are sub- servient.! .! .! .! They were often doing better in their individual store sales and we didn’t want to tamper with that. So, [after the sale] we allowed them to operate separately!.!.!.!while trying to figure out where we could add real value. After a HR audit, we knew what they had and what they needed. We met with the general manager and key operational management, and gave them an overview of all the things we had that might be helpful and let them pick and choose.

Some early wins were achieved in terms of standard- izing processes. First, Bosley’s participated in the devel- opment and implementation of Pet Valu’s online learning sales module for store employees, which teaches effective ways to utilize product knowledge in the sale of products to customers. Second, Bosley’s decided to use Pet Valu’s materials for effective and standardized recruitment and employee appraisals. Ms. Martin Bevilacqua describes what happened:

It was a sort of sharing backwards of what would be of value to them [Bosley’s] rather than telling them to follow a whole bunch of procedures.!.!.!. They chose what ones they want to start with.!.!.!. If you take over a company you often just enforce the larger organization’s standards.!.!.!.!But we let them pick and choose what they would like to invite in, knowing that we had as much to learn from them as what we could provide in terms of resources.

Early on, it was not as straightforward as giving tools and practices away to the newly acquired retailer chain. Ms. Martin Bevilacqua indicates that “at first we drowned Bosley’s in involvement.” However, later she indicates that this eventually worked in their favour, as Bosley’s

(continued )

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// HR ISSUES IN M&AS Experts in HRM have much to say about increasing the success rate of mergers. Indeed, when HR is involved early in the process, the merger is more likely to be successful.57 The impact of a merger on HRM is discussed below, using the familiar functional areas of HR.

employees felt comfortable approaching HR on their own because they began to value the new resources available to them. Christine recalls the integration approach:

An easy and immediate way of building bridges on things that maybe they [Bosley’s] didn’t have the time or resources to address!.!.!.!where you can create synergies that make sense and then balance[e] these synergies with what good for the business.!.!.!.!Slowly but surely we were essen- tially making them part of the larger organization.

Pet Valu’s approach to acquisition integration posi- tioned the company for double-digit growth in sales for stores. It also gave Pet Valu a model for future purchases, something core to its strategic plan. In the end, the acqui- sition allowed Pet Valu to achieve its strategic goals of entering a new market and establishing operations. Ms. Martin Bevilacqua summarizes, “While the first two steps were straightforward, the ultimate goal was sharing resources through integration, and this is where HR was able to add value.”

Sources: The Canadian Press. 2009. “Pet Valu sold to U.S. private equity firm.” The Toronto Star, Online, (July 6), Available: http://www.thestar.com/ business/article/661481. (Accessed June 2, 2011). Correspondence with Christine Martin Bevilacqua, Vice President, Human Resources Manage- ment, Pet Valu Inc., June 2011.

HR PLANNING NOTEBOOK 12.4

THE CULTURAL DUE DILIGENCE CHECKLIST

Research tells us that those companies that actively manage their cultures attain higher revenues and profits than those that do not. This is particularly important during a merger, but indeed less than 10 percent of companies actively spend time on cultural fit issues during integration. Here are the steps:

1. Conduct a cultural audit of each organization, through qualitative research (e.g., interviews, focus groups) or through quantitative surveys.

2. Identify similarities and differences, and discuss these. Create a new employee value proposition from the strengths of each culture.

3. Use acculturation strategies such as cross-functional sem- inars and graduation ceremonies (to let go of the “old”), and provide cultural mentors to strengthen integration.

4. To overcome cultural challenges, celebrate small wins, acknowledge value in past practices, and mea- sure progress at regular intervals.

Sources: “HR Issues Are Bottom of M&A Checklists,” Personnel Today, January 6, 2004, p. 3; S.H. Applebaum and J. Gandlel, “A Cross Method Analysis of the Impact of Culture and Communications upon a Health Care Merger: Prescriptions for Human Resources Management,” Journal of Management Development, Vol. 78, No. 6 (2003): 108–116; M. Johne, “The Human Factor: Integrating People and Culture after a Merger,” CMA Management, Vol. 74, No. 3 (2000): 30–37; R. Miller, “How Culture Affects Mergers and Acquisitions,” Industrial Management, Vol. 42, No. 5 (2000): 22–27; and K. Walker, “Meshing Cultures in a Consolidation,” Training and Development, Vol. 52, No. 5 (1998): 83–88.

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NEL 331CHAPTER 12 Mergers and Acquisitions

HR PLANNING In a merger, planning moves beyond the traditional concepts of HR planning for several reasons. HR planning in an M&A situation has several dimensions that are not part of the normal planning process.

1. THE CONTINGENCY PLAN

Strategic planners must be aware of the board of directors’ interest in M&As. Based on this expressed interest, a contingency plan that can be implemented when a deal is in play should be prepared. The plan should identify the contact person and the merger coordinator, who should have received training in effective merger management. The contact person should develop a plan, one similar to emergency plans developed for fires or gas leaks; it should outline the chain of command, methods for communicating, procedures to follow during a takeover, and negotiation skills training and media response training for the senior team. It should also identify a transition team.58 Some companies even keep lists of compatible white knights (in cases of being targeted for acquisition) and prepare lists of consultants who are experts in negotiation techniques or produc- tivity enhancement methods. Some organizations that grow through acquisitions have a dedicated M&A specialist on their HR team.59

2. HR DUE DILIGENCE

The second element of HR planning in an M&A situation is the need to conduct a due diligence review.60 Due diligence is a process through which a potential acquirer evaluates a target firm for acquisition.61 Hundreds of questions are asked about areas from tax implications to differences in culture, in order to ensure that the right price is paid and that the chances of success are measured. The first question to be asked is how the transaction is structured, as this affects the treatment of employees, as is described in HR Planning Notebook 12.5. Researchers have found that there is a

HR PLANNING NOTEBOOK 12.5

SHARE OR ASSET PURCHASE

Share purchase: The purchaser acquires the shares of a company. The corporate entity continues to exist, and employees are retained. Asset purchase: The purchaser acquires all or some of the company’s shares, but there is a different corpo- rate entity that continues the management of the busi- ness. Employees of the company are transferred to the

purchaser (i.e., no longer work for the seller), and a new employment relationship must be worked out with the purchaser. In general, the purchaser has no legal obligation to hire all or some of the employees or provide them with the same working conditions and terms. But in practice, most purchasers do so in order to carry on with business and to limit liability for terminations.

Source: D. Corbett, “HR Issues in M&A,” HR Professional (August/September 2002), pp. 18–21.

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tendency for hard criteria to drive out soft criteria: in other words, if the numbers look good (reduced head count, more customers etc.), any issues about culture differences tend to be dismissed.62

From an HR perspective, the due diligence would include a review of the following:

• Collective agreements • Employment contracts • Executive compensation contracts (particularly “golden parachutes”: lump-sum

payments made to executives who lose their jobs as a result of an M&A) • Benefit plans and policies • Incentive, commission, and bonus plans • Pension plans and retirement policies • Workers’ Safety and Insurance Board (WSIB) statements, claims, assessments,

and experience rating data • Employment policies • Complaints about employment equity, health and safety, wrongful dis-

missal, unfair labour practices, and applications for certification and grievances

The authors would also strongly recommend that cultural differences be investigated during this phase.

Sometimes these liabilities (e.g., an enriched retirement plan) or obligations (e.g., an incentive plan) may kill the deal. Pension plans are often the deal killers. Pension plan liabilities (e.g., defined benefits) can impact profit estimates. Changes to the pension plan may affect employee morale and productivity.63 Once the legal obligations have been thoroughly assessed, the level of employees’ knowledge, skills, abilities, and other attributes (KSAOs) must be evaluated. The HR planning team then addresses the suitability of current management talent and cultural fit. A deal may be aborted if talent shortfalls are extreme or if the cultures are seriously incompatible. There are several ways to assess employee capabilities, including the following:

• Reviewing all employee documentation (CVs, perfor- mance appraisal reports etc.) and then conducting inter- views with the managers at a minimum of four levels64

• Determining contractual obli- gations with regard to early retirements, terminations, promised new jobs, and pre- merger levels of turnover65

Despite the obvious ben- efits of involving the HR team in due diligence, only 4 out of 10 companies do so.66

Due diligence includes a review of collective agreements and employment contracts.

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NEL 333CHAPTER 12 Mergers and Acquisitions

3. TRANSITION TEAM

A third element of HR planning is the need to appoint a transition team. This is necessary because of the urgency of the M&A situation and the information gaps and employee stress that characterize it:

• Urgency: Staffing decisions, such as terminating, hiring, evaluating, and training, become urgent. Planners don’t have the luxury of planning in three- year periods, during which orderly succession proceeds as predicted. Job analyses must be conducted immediately to identify duplicate positions and new work processes. Soon after the merger is announced, decisions about the retention of employees and the reassignment of others have to be made and executed humanely. At the same time, marketable employees are finding jobs elsewhere and customers are re-examining their business relationships. The uncertainty impedes productivity and new business development.

• Information gaps: While both companies might have excellent plans for employees and reams of documentation, these plans have to be adjusted to the merged needs. For example, the targeted company may have prepared suc- cession plans for its finance department, but now most of these positions (and people) are redundant because the bidder may have its own finance depart- ment. Furthermore, the merged company may use its combined resources to seek businesses in new countries (with different financial reporting or tax laws), and neither of the merged companies may have that expertise. Thus, the information accumulated to date may have to be updated rapidly and revised in light of the new needs. The loss of capable employees, those who are mar- ketable and can easily find other jobs, also results in the need to update plans continuously during a merger. Upon the announcement of its merger, AOL Time Warner immediately created an online tutorial that explained the reasons for the merger, how it affected employees, and career opportunities under the new regime.67

• Stress: The moment that the companies go “into play,” employees are stressed because they are aware of the traditional fate of employees in merged compa- nies. Most employees realize that most positions are duplicated. A transition team, whose sole concern is HR issues in the merger, must be appointed. The transition team may be the most important determinant of merger success. The role and responsibilities of the transition team are outlined in HR Planning Notebook 12.6.

The goals of the transition team are to retain talent, maintain the productivity (both quantity and quality) of employee performance, select individuals for the new organi- zation, integrate HR programs (e.g., benefits, incentive plans), and take the first steps toward the integration of cultures. Some have adopted a 100-day strategy. The anxiety felt by employees and other stakeholders is lessened when the merger team announces that within 100 days of closing, all job decisions will have been made. The impact that this team can have on the retention of key employees is so great that some companies, like Dow Chemical, have a permanent “integration” team that manages all acquisitions, and is able to build on previous successes.69

As the transition team is handling the urgent matters, the HR planners can under- take the revisions necessary to prepare HR plans. Employee skills inventories must be updated and succession plans revised. If the business enters new sectors and requires new

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HR PLANNING NOTEBOOK 12.6

THE TRANSITION TEAM

Senior vice-presidents of HR who have had a lot of experience in mergers recommend that a transi- tion team be appointed to deal with the concerns of employees in mergers. These persons cite the need to deal with employee stress before the stress renders employees incapable of working. In addition, it is known that employees who have access to information about their future are less likely to begin a job search and leave the organization. Communication is critical, and employees should be the central focus of communica- tion efforts.

Here are some elements of a good merger manage- ment process:

• A formal announcement: When a merger or acqui- sition is announced, the CEO should issue a state- ment containing the following items of information: • The rationale for the merger—that is, its

intended benefits • General information about both companies • Information about changes in the corporate

name and structure, particularly changes in key management positions

• Plans for employee reductions

• Plans for recognizing and working with the union

• Plans for changes in products or services • Detailed information about changes in benefits,

or the date for decisions about such changes • A merger hotline: When Inland Gas purchased

Mainland Gas, creating BC Gas, the company immediately set up a hotline so that employees could call the vice-president of HR and ask direct questions. Another company created a video in which the CEO talked about the changes.

• A managerial toolkit: This toolkit included iden- tifiable support resources who could address employee concerns and fears.68 The board of directors should be provided with a list of pos- sible questions and answers.

• A newsletter or web page: Experts agree that the formation of communication channels must be swift and consistent, and all communication must be honest. One company created a fictional employee (“Frank”) who, on behalf of the workforce, asked questions about the merger and reported back to the employees, from their perspective.

Source: Adapted from T.J. Galpin and M. Herndon, The Complete Guide to Mergers and Acquisitions, San Francisco, CA: Jossey-Bass, 2000.

labour pools, these labour pools have to be identified and the need for them assessed. Employment equity data have to be revised and, perhaps, resubmitted to the relevant agencies. On the basis of the revised strategic plans, the HR department must revise and align its plans and produce a new forecast for HR requirements.

A review of the HR policies will likely reveal three types of situations:

• Complementary: One company might focus on career development, while the other focuses on benefits.

• Duplicated: Both companies have identical human resources information sys- tems (HRIS).

• Contradictory: One organization uses the performance management system for career development while the other uses its system to support incentive pay programs, by measuring employee productivity to determine bonuses or merit pay.70

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NEL 335CHAPTER 12 Mergers and Acquisitions

SELECTION Retention and reduction, paradoxically, are two critical areas that must be addressed immediately. The typical scenario is that over two-thirds of executives are replaced or leave within three years.71 Duplicate positions and redundant employees must be ter- minated, and highly qualified employees in critical positions must be motivated to stay. The first critical question is “How many employees does the merged company need?” The answer is not to eliminate the most jobs possible in an attempt to operate a lean and mean corporation; the result would be work overload and stress. The answer may lie in benchmarking statistics. Increasingly, HR professionals are developing benchmark data by sector. For example, one merged hospital, which employed six full-time workers per occupied bed, reduced the number of employees to match the benchmark of four full-time workers per occupied bed.72

Of course, it is not just the numbers of employees that are subject to analysis but the types of employees. One company classified workers in these ways:

• Transition—employees not needed in the new enterprise and requiring a plan to assist them in phasing out

• Integration keys—employees who possess critical skills for the transition period, but not for the future of the company

• Keepers—high performers in needed roles • Long-term stars—key talent needed for the business73

Key workers must be identified and offered retention bonuses and employment agreements. Employees are offered incentives to stay at least until the deal closes—often, for periods after the closure. The superstar financial brokers at Merrill Lynch were offered a one-time retention bonus of 110 percent of their take-home pay (more than $1 million a year) by CIBC in order to retain them. The retention bonus was structured as a five-year loan so that each year 20 percent of the loan was forgiven.74 Retention bonuses may work in the short term, but acquiring companies like Cisco often offer them in order to access talent that they wish to retain in the long term. The reasons that executives choose to leave include poor communications between the firms; a feeling of inferiority and loss of status and uncertainty about their future role. In order to increase the retention rates of these employees, companies should increase their engagement through clarified career paths, mentoring, developmental programs etc.75

Reductions might be necessary. The dismissal process can be heartbreaking, as is described in one merger case.76 In the rush to terminate quickly, some employees were notified by voicemail or email or in hurried and short meetings with strangers. A supervisor was forced to fire three of his employees before being fired himself. His termination was particularly difficult to understand, as his performance reviews had been excellent. As wave after wave of salespeople were laid off, customers became confused about their contacts. Departing employees took advantage of this and went to the competition, taking the business relationships with them.

Chapter 10 covered this aspect of restructuring in detail. A number of decisions must be made immediately. Employees will want to know if they will be offered employment in the merged company; if not, they will want to know what the severance packages contain. If jobs are offered, can employees choose not to accept them? For those wary of the new owner or who fear being dumped once the sale closes, will there be a safety net? For those who are terminated, will assistance such as financial planning, job relo- cation, and career planning be offered? Will benefits continue for a short adjustment

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period? One organization, which could not promise job security to its employees, did promise to position them for work in the new organization or outside it.77 This pledge was kept; employees were trained, at organizational expense, for other positions. Part of the training included seminars in which employees were taught to be responsible for their own development and were given assistance to develop a survival kit called Making Me Marketable. Jobs were reanalyzed to focus on basic skills. For example, the job specifications for a patient-care technician stated that a high school diploma was required, but a review showed that certain skills, and not a high school diploma, were needed to do the job. Managers used their contacts and networks to assist departing employees. Employees were encouraged to work on cross-functional teams to expand their horizons and skills. The result was that productivity did not diminish dramati- cally, as occurs in most mergers. Furthermore, the downsizing and exodus were orderly, lessening the stress on remaining employees. The culture was changed, and employees were rewarded.

Those who stay with the newly acquired or merged company face several fates:

• Demotion: Under the new organizational structure, some employees are given less responsibility, less territory, or fewer lines due to amalgamation.

• Competition for the same job: Some companies force employees to compete for their old jobs by having to apply as new candidates for a position.

• Termination: If not successful in the competition, employees are then let go. Sometimes, the acquiring firm waits until it can obtain its own appraisal of employee capabilities and has a chance to determine fit.

The survivors have adjustments to make, and these were detailed in Chapter 10. Like employees involved in a restructuring, the survivors of a merger are dealing with their loss of identity as the company changes, a lack of information and the resultant anxiety, a lack of protection from adverse effects over which they have no control, the loss of colleagues, and a change in their jobs.78 Those remaining with the corporation will need to know about compensation plans.

COMPENSATION Two companies with two different compensation systems have to merge their systems, adopt one, or create a new one. AOL Time Warner replaced the straight salary system of Time Warner with the AOL system of salary plus stock options.79 Incentive plans have to be aligned to support the merger strategy. But consideration can be given to incentives to make the merger work. BC Gas gave each employee 50 free shares and introduced an attractive stock purchase plan to promote commitment to the new company.80

In a merger, a major issue for the HR department is the integration of benefit plans. Which company’s plan should be adopted? Employees obviously wish for the most favourable benefits, but organizations are concerned with cost. If the buyer’s benefit packages are significantly lower than the seller’s programs, any attempt to match this would result in staggering additional costs.81 However, when benefits are removed or reduced in the integration of companies, employees may experience loss of morale. More seriously, if employees are subjected to materially different compensation pack- ages, they could sue for constructive dismissal. Thus, for employees in the process of considering their futures with the organization, the resolution of the benefits package may affect their decision.

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NEL 337CHAPTER 12 Mergers and Acquisitions

The best resolution of this problem would be to conduct a cost–benefit analysis of the benefits, package by package. For example, childcare centres or health and wellness centres may seem to be costly benefits. But if the number of sick days and mental health days taken is significantly reduced or employee turnover is diminished, then the benefits may outweigh the costs. Pension concerns will be high. Although there are regulations governing certain pension credits, different approaches to pension plan transfers must be analyzed, as variances can run into the millions of dollars.

For employees who are being terminated, retaining certain benefits during the months or years after the merger may be a humane way to soften the adverse effects of the merger. Companies may wish to offer extended medical and dental coverage, modified retirement plans, and some counselling to deal with unemployment and with career plans.

PERFORMANCE APPRAISAL During a merger, employees undergo stress, and productivity can be expected to drop. Focusing on long-term goals may be difficult and so short-term goals should be substi- tuted. Business is not as usual. The role of the manager may change from one of super- visor to one of coach. Employees may play it safe and may require constant positive reinforcement for the work they do accomplish under the new house rules.

One model describes employee behaviour during a merger as falling into one of three categories: not knowing (remedied by more communication), not able (the solu- tion is training), or not willing (a strong case for performance management through feedback and incentives).82

Performance appraisals for development purposes may have to be redone. The merged company may be larger or engaged in different businesses, allowing for more or different promotion paths and developmental experiences. Employee intentions and aspirations under the new regime will have to be redocumented.

Stress levels may necessitate a relaxation of the rules and more counselling and coaching. Personal problems (such as financial or marital difficulties), rather than per- formance problems, may surface as the stress begins to affect employees.

TRAINING AND DEVELOPMENT After the strategic plan has been developed, an inventory of the KSAOs needed to align with the strategy should be undertaken. Information based on previous needs analyses might have to be revised in light of the new strategy, which may create new jobs.

Managers and peers may need some additional training in the role of coach and counsellor. Every employee might benefit from stress reduction or relaxation programs. Developmental programs, such as overseas assignments or executive exchanges, or long- term educational opportunities, may be put on hold while the new organization estab- lishes long-term plans.

LABOUR RELATIONS Unionized employees are covered by a collective agreement, which is a legally binding document. In an asset purchase, the agreement will require the purchaser to continue the employment of all unionized employees with identical conditions of employment.

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Typically, these agreements set out the conditions under which job changes must occur. At a minimum, the collective agreements must be read to determine what provisions exist for job security and what the notification periods are for layoffs and terminations. Merger experts say that unions should be informed and involved from the outset of the merger so that they can make valuable contributions. Unions are perceived as independent from management and can help to obtain the trust and confidence of the workforce to participate in a change program. Those companies that involved unions had reduced labour disruptions and grievances.83

// EVALUATION OF SUCCESS As you can see, HR plays a pivotal role in the success of M&As. As you have read earlier, many organizations are disappointed because the purported benefits of the M&A were not realized. Success can be measured through financial measures, customer service metrics, human capital metrics, and operational measures. One organization that tracked these measures talked about its successes in exceeding profit targets, exceeding customer satisfaction targets, employee engagement (six months after the merger 80 percent were highly engaged and all top performers had been retained), and 100 percent achievement of operational efficiencies and synergies.84 Read about HR practices in two very successful deals in HR Planning Today 12.5.

HR PLANNING TODAY 12.5

HR MAKING A DIFFERENCE IN MERGERS

• Encana was created in 2002 out of the acquisi- tion of Alberta Energy Co. by PanCanadian Energy. The transaction has been called a stunning suc- cess, and the share price has increased since its initial listing. Officials attribute this success to speed, saying, “The quicker you remove uncer- tainty, the better off you are. We all know mergers that have dragged on for a year or two, and that would be extremely counterproductive.” One week after shareholders gave their approval, layoffs were announced internally. Within four weeks, employees were given the names of their new supervisors, their compensation packages, and a

high-performance contract, which outlined career objectives and goals for the year.

• TD Bank acquired Canada Trust in 1999, and had to integrate 1500 branches, 44 000 employees, 10 million customers, and $265 billion in assets. Senior executives immediately notified employees about how their jobs would be affected. Real- izing that if a glitch occurred in its bank machine network, which handles 700 transactions per second, customers, as well as employees and shareholders, would resist the merger, branches were converted in waves, starting on the East Coast.

Source: J. Kirby, “The Trouble with Mergers,” Canadian Business, Vol. 77, Issue 4 (February 16, 2004), pp. 65–75.

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// SUMMARY The focus of this chapter was the HRM implications of M&As. Mergers are undertaken to provide a strategic benefit or a financial benefit, or to fulfill the psychological needs of the managers. The financial and other results of mergers are not always as positive as expected, and the effect on staff can be devastating, whether or not employees stay with the merged company. The culture of the previously separate companies and the new merged company is the area that experts say is the most important predictor of merger success. The merger has an impact on each of the functional areas—HR planning, selection, compensation, performance appraisal, training and development, and labour relations.

KEY TERMS conglomerate merger p. 317 consolidation p. 318 culture p. 326 horizontal integration p. 320 horizontal merger p. 316 operating synergy p. 318 takeover p. 318 vertical integration p. 320 vertical merger p. 317

DISCUSSION QUESTIONS 1. What are the reasons that a company would acquire another company? Search the

business press for a recent acquisition, and rank the reasons for the acquisition as explained by the analysts and/or executives.

2. Describe the effects that a merger may have on employees. What can management do to lessen the more negative effects of a merger? What can employees do to protect themselves when they start to hear rumours of a merger?

3. One of the urgent issues facing executives immediately after the merger is announced is the retention of key employees. How would you define or describe a key employee? What methods would you use to identify key employees? Describe some programs you might use to retain your key employees during and after the merger.

EXERCISE 1. The term merger implies a merging of two organizations’ systems and culture. The term

acquisition implies that that acquired company will be forced to adopt the systems and culture of the parent company. But in reality, there are five options: (1) dual companies— run the two side by side (Best Buy and Future Shop are owned by the same company); (2) the parent company dominates (Scotiabank purchases many Caribbean banks); (3) the acquired company dominates (Saatchi and Saatchii was acquired by Publicis, the world’s fourth-largest advertising and communication company, which adopted S&S’s operating systems and culture—a kind of reverse takeover); (4) blend the best of both (this was done in the acquisition of Gillette by Procter & Gamble); and (5) build a new company (Burroughs and Sperry united to build a new company, UNISYS). In groups, discuss the advantages and limitations of each of these options.

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340 NELStrategic Human Resources Planning

CASE STUDY MOLSON COORS AND ACQUISITIONS

The history of Molson started over 220 years ago when John Molson invested in a little brewery. Over the past two centuries, Molson acquired a steamship line, a luxury hotel, and a theatre. In 2005, Molson and Coors merged to become the third-largest beer maker in the world, with a market cap of US$8 billion. After two centuries of M&A experience, one would expect Molson to be an expert on the management and integration of acquisitions. This case will describe two acquisi- tions, both breweries—one successful and the other a failure.

In 2002, Molson acquired Brazil’s second-largest beer maker, Kaiser, for US$765 million. Four years later, the company was worth US$68 million, thus experiencing one of the worst corporate losses in Canadian business history. The acquisition was costing $100 million a year just to survive, and Molson lost 50 percent of the market share. Analysts suggest that one of the reasons for the failure was the use of North American management techniques in the very different South American business climate. The company should have delegated decision making to local operators and had at least one independent director from Brazil on the board.

The bureaucracy in Brazil is overwhelming, and it is vital to have local partners who understand this. The second error was the attempt to bring the Brazilian beer Bavaria to Canada in an attempt to penetrate the premium beer category. This too was a disaster, one not helped by the soft-porn marketing campaign; Bavaria is no longer being sold in Canada.

In 2005, Molson Coors Brewing bought a craft brewer, Creemore Springs Brewery, for $17 million. The brewery had $10 million in sales. Interestingly, Molson spent $20 million on the transaction costs associated with the merger. Creemore was a highly successful small-time brewery, making what some experts on beer called one of the two best lagers in North America. The image of a small-time brewer that did not advertise and cared deeply about the product was at risk when Creemore was acquired by Molson, which specialized in mainstream beers. Creemore produces about 40 000 hectolitres of beer (about 12 million bottles), compared with the 48 million bottles produced by Molson Coors. It is very tempting to view the acquisition of Creemore as creating opportunities for economies of scale, entering new markets, and all the other reasons companies acquire other companies. Indeed, some of the advantages have occurred: Creemore uses the larger company’s distribution systems and gets better discounts on purchases. But Creemore decided not to use Molson’s canning operations, which can produce 1000 cans a minute, and instead retained a production facility in Creemore, producing 21 cans a minute. Creemore has the same brewmaster and almost all the same employees and management has almost complete decision-making authority.

Sources: A. Holloway, “The Molson Way,” Canadian Business, Vol. 80, Issue 8, (April 9, 2007), p. 36; and A. Holloway, “Tale of Two Brews,” Canadian Business, Vol. 79, Issue 12, (June 5, 2006), p. 63.

QUESTIONS 1. Using HR Planning Notebook 12.2, what do you think were the reasons

for the acquisitions in both cases? 2. Describe the HR implications under a full integration scenario (Kaiser)

and a hands-off acquisition scenario (Creemore Springs).

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// REFERENCES 1. Chevallier, F. 2007. “Leading a Rapid Retail Transformation—Acquisition of

93 Stores Required Quick Integration and Standardization Across Canada.” Optimize, Vol. 6, No. 6: 35.

2. Martin, R. 2016. “M&A: The One Thing You Need to Get Right.” Harvard Business Review (June): 43–48.

3. Wells, S.J. 2004. “Merging Compensation Strategies.” HR Magazine, Vol. 49, No. 5: 66–74; Bryson, J. 2003. “Managing HRM Risk in a Merger.” Employee Relations Vol. 25, No. 2: 14–31.

4. Marmenout, K. 2011. “Peer Interaction in Mergers: Evidence of Collective Rumi- nation.” Human Resource Management, Vol. 50, No. 6: 783–808; Silliker, A. 2012. “M & A’s Increase Risk of Anxiety.” Canadian HR Reporter, Vol. 25, No. 6: 1, 9.

5. SDC Thompson Reuters. Retrieved May 30, 2011. 6. Anonymous. “Merger and Acquisition Outlook.” CA Magazine, Vol. 141,

No. 4: 10. 7. Pitts, G. 2005. “Timid Canada Falls Prey to a Global M&A Boom.” The Globe

and Mail (October 12): B9. 8. Schraeder, M., and D.R. Self. 2003. “Enhancing the Success of Mergers and

Acquisitions: An Organizational Cultural Perspective.” Management Decision, Vol. 41, No. 5: 511–523.

9. McIntyre, T.L. 2004. “A Model of Levels of Involvement and Strategic Roles of Human Resource Development (HRD) Professionals as Facilitators of Due Diligence and the Integration Process.” Human Resource Development Review. Vol. 3, No. 2 (June): 173–183.

10. Edwards, C., and A. Park. 2002. “HP and Compaq: It’s Showtime.” BusinessWeek (June 17): 76–77.

11. Gilbert, C., K. Louiseeize, and A. Larmour. 2005. “Exploring the Inco Merger.” Northern Ontario Business, Vol. 26, No. 1: 1–2.

12. Master, L.J. 1987. “Efficient Product of Financial Services: Scale and Scope Economies.” Federal Reserve Bank of Philadelphia (January/February): 15–25.

13. Ficery, K., T. Herd, and B. Pursche. 2007. “Where Has All the Synergy Gone? The M&A Puzzle.” The Journal of Business Strategy, Vol. 28, No. 5: 29–35.

14. “XM, Sirius Moves Closer to Merger in Canada.” 2011. The Globe and Mail, (February 17): B1.

15. Anand, J. 2000. “A Match Made in Heaven.” Ivey Business Journal, Vol. 64, No. 6 (July/August): 68–73.

16. Graebner, M., K. Eisenhardt, and P. Roundy. 2010. “Success and Failure in Technology Acquisitions: Lessons for Buyers and Sellers.” The Academy of Management Perspectives, Vol. 24, No. 3: 73.

17. Lubatkin, M.H., and P.J. Lane. 1996. “Post—The Merger Mavens Still Have It Wrong.” Academy of Management Executive, Vol. 10, No. 1 (February): 21–39.

18. Hamel, G., and C. Prahalad. 1989. “Strategic Intent.” Harvard Business Review, Vol. 3: 73.

19. Hosskisson, R.E., M.A. Hitt, and R.D. Ireland. 2004. Competing for Advantage. Mason, OH: Thompson South-Western.

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20. Roll, R. 1986. “The Hubris Hypothesis of Corporate Takeover.” Journal of Business, Vol. 59, No. 2 (April): 197–216.

21. Kroll, M., P. Wright, L. Toombs, and H. Leavell. 1997. “Form of Control: Determinant of Acquisition Performance and CEO Rewards.” Strategic Management Journal, Vol. 18, No. 2 (February): 85–96.

22. Kets de Vries, M.F.R. 1991. “Introduction: Exploding the Myth That Organizations and Executives Are Rational.” In M.F.R. Kets de Vries and Associates, eds., Organizations on the Couch: Clinical Perspectives on Organizational Behavior and Change. San Francisco: Jossey-Bass.

23. Rovenpor, J.L. 1993. “The Relationship Between Four Personal Characteristics of Chief Executive Officers and Company Merger and Acquisition Activity.” Journal of Business and Psychology, Vol. 8, No. 1 (Fall): 27–55.

24. Zwieg, P.L. 1995. “The Case Against Mergers.” BusinessWeek (October 30): 122–130.

25. Martin, R. 2016. 26. Guerrero, S. 2008. “Changes in Employee Attitudes at Work Following an

Acquisition: A Comparative Analysis.” Human Resource Management Journal, Vol. 18, No. 3: 216–236.

27. Gaughan, P.A. 1996. Mergers, Acquisitions, and Corporate Restructuring. New York: John Wiley & Sons.

28. Edwards and Park. 2002. 29. Barney, J.B., and W.S. Hesterly. 2008. Strategic Management and Competitive

Advantage (21st ed). Upper Saddle River, NJ: Pearson Prentice-Hall, p. 317. 30. Schonfeld, E. 1997. “Have the Urge to Merge? You’d Better Think Twice.”

Fortune (March 31): 114–116. 31. Fisher, A. 1994. “How to Make a Merger Work.” Fortune, Vol. 129, No. 2

(June 24): 64–66. 32. Gill, C. 2012. “The Role of Leadership in Successful International Mergers and

Acquisitions.” Human Resource Management” Vol. 51, No. 3 (May/June): 433–456. 33. Kadlec, R.E. 1990. “Managing a Successful Merger.” Business Quarterly, Autumn. 34. Yuce, A., and A. Ng. 2005. “Effects of Private and Public Canadian Mergers.”

Canadian Journal of Administrative Sciences, Vol. 22, No. 2: 111–125. 35. Harshbarger, D. 1990. “Mergers, Acquisitions, and the Reformatting of

American Businesses.” In D.B. Fishman and C. Cherniss, eds., The Human Side of Corporate Competitiveness. Newbury Park, CA: Sage Publications.

36. Guerrero. 2008. 37. Galpin, T.J., and M. Herndon. 2000. The Complete Guide to Mergers and

Acquisitions. San Francisco, CA: Joss-Bassey. 38. Laroche et al. 2001. 39. Hollister, M. 1996. “Competing Corporate Cultures Can Doom

Acquisition.” Human Resource Professional (January/February): 7–10. 40. Laroche et al. 2001. 41. Dackert, I., P.R. Jackson, S. Brenner, and C.R. Johansson. 2003. “Eliciting

and Analyzing Employees’ Expectations of a Merger.” Human Relations, Vol. 56, No. 6: 26–32.

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42. Bryson. 2003. 43. Howes, C. 2001. “There Is More to a Merger Than Making a Buck: Making

Cultures Fit.” Financial Post (February 2): C5. 44. Bernhut, S. 2000. “Bridging Cultures Adding Value in a Merger.” Ivey

Business Journal, Vol. 64, No. 3: 53–58. 45. Cartwright, S., and C.L. Cooper. 1993. “The Role of Culture Compatibility

in Successful Organizational Marriage.” Academy of Management Journal, Vol. 7, No. 2: 57–70.

46. Pekala, N. 2001. “Merger They Wrote: Avoiding a Corporate Culture Collision.” Journal of Property Management, Vol. 66, No. 3: 32–37; Miller, R. 2000. “How Culture Affects Mergers and Acquisitions.” Industrial Management, Vol. 42, No. 5: 22–27.

47. Marks, M.L., and P.H. Mirvis. 2011. “A Framework for the Human Resources Role in Managing Culture in Mergers and Acquisitions.” Human Resource Management, Vol. 50, No. 6: 859–877.

48. Laroche et al. 2001. 49. Corporate Leadership Council. 2001. “Cultural Assessment Tools for

Mergers and Acquisitions.” July. 50. Marks and Mirvish. 2011. 51. Riddel, A., and F. Lipson. 1996. “Bankrupt Hospital Lands on Its Feet.”

Personnel Journal (August): 83–86. 52. Koeth, B. 1985. “Expressly American: Management’s Task Is Internal

Development.” Management Review (February): 24–29. 53. Frers, K., and A. Chada. 2000. “Why You Can’t Create a Purple-Footed

Booby.” Canadian HR Reporter, Vol. 13, No. 20: 16. 54. Klie, S. 2009. “HR Perspective Makes Acquisitions a Success.” Canadian

HR Reporter, Vol. 22, No. 14 (August 10): 10–11; Konpichayanond, P. 2009. “Knowledge Management for Sustained Competitive Advantage in Mergers and Acquisitions.” Advances in Developing Human Resources, Vol. 11, No. 3: 375.

55. Anonymous. 2009. “M&As Fail Far Too Often and It’s Avoidable.” Canadian HR Reporter, Vol. 22, No. 14: 11.

56. Rees, C., and Edwards, T. 2008. “Management Strategy and HR in International Mergers: Choice, Constraint and Pragmatism.” Human Resource Management Journal, Vol. 19, No. 1: 24–39.

57. Anonymous. 2005. “HR’s Growing Role in M&A Due Diligence.” HR Focus, Vol. 82, No. 8 (August): 1–5.

58. Stuart, P. 1993. “HR Actions Offer Protection During Takeovers.” Personnel Journal ( June): 84–95.

59. Anonymous. 2008. “Cognizant Post Recognizes HR’s Role in Mergers.” Workforce Management, Vol. 87, No. 10: 12.

60. Walker, J. 1992. Human Resource Management. New York: McGraw-Hill. 61. Hoskisson, R.E., M.A. Hitt, and R.D. Ireland. 2004. Competing for Advantage.

Mason OH: Thompson South-Western. 62. Marks, M., and P. Mirvis. 2011. “Merge Ahead: A Research Agenda to

Increase Merger and Acquisition Success.” Journal of Business and Psychology, Vol. 26, No. 2: 161–168.

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63. Leisy, B. 2009. “5 Questions: Addressing HR Risk.” Workforce Management, Vol. 88, No. 1: 8; Sorhaitz, K., and D. McCullagh. 2011. “Merge Ahead.” Benefits Canada, Vol. 35, No. 4: 38–40.

64. Kummer, C. 2008. “Motivation and Retention of Key People in Mergers and Acquisitions.” Strategic HR Review, Vol. 7, No. 6: 5–10.

65. Tanuer, B., and R. Gonzalez-Duarte. 2007. “Managing People in Radical Changes (M&As): The Adoption of Intrinsically Consistent HRM Strategies in Brazilian Companies.” International Journal of Manpower, Vol. 28, No. 5: 369–383.

66. Galpin and Herndon. 2000. 67. Adams, M. 2002. “Making a Merger Work.” HR Magazine, Vol. 47, No. 3:

52–57. 68. Parks, N. 2004. “Managing the HR Challenges of a Major Global Merger.”

Strategic HR Review, Vol. 4, No. 1: 24–27. 69. Klie, S. 2009. “HR Perspective Makes Acquisitions a Success.” Canadian HR

Reporter, Vol. 22, No. 14 (August 10): 10–11. 70. Kemp, A., and P. Lytwyn. 2002. “Merging HR Departments: How to Make It

Work.” HR Professional (August/September): 29–30. 71. Tannous, G.F., and B. Chang. 2007. “Canadian Takeover Announcements

and the Job Security of Top Managers.” Canadian Journal of Administrative Sciences, Vol. 24: 250–267.

72. Riddel and Lipson. 1996. 73. Galpin, T., J.L. Whittington, and R. Maellaro. 2012 “Identifying, Retaining

and Re-engaging Key Talent during Mergers and Acquisitions: A Best Practices Framework.” People and Strategy, Vol. 35, No. 1: 42–48.

74. Alphonso, C. 2002. “Top Staff Gain Clout in Mergers.” The Globe and Mail (May 29): C1.

75. Dobson, S. 2013. “Retention, Culture Critical to M & As. Canadian HR Reporter, Vol. 26, No. 5: 1, 8.

76. Schonfield, E. 1997. “Have the Urge to Merge? You’d Better Think Twice.” Fortune (March 31): 114–116.

77. Riddel and Lipson. 1996. 78. Walker. 1992. 79. Buchanan, R., and M. Daniell. 2002. “The Leadership Testing Ground.”

Journal of Business Strategy, Vol. 23, No. 2: 12–17. 80. Kadlec. 1990. 81. O’Rourke, R.W., and B.R. Berg, 2005. “Avoiding Costly Benefits Bloopers

in Mergers and Acquisitions.” Employee Benefit Plan Review, Vol. 60, No. 1: 11–14.

82. Galpin and Herndon. 2000. 83. Bryson. 2003. 84. Cascio, W.F. 2010. “Done Deal: Now Manage Post Merger Integration.”

HR Magazine, Vol. 55, No. 10: 43–46.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Define outsourcing. • List the reasons organizations outsource functions and programs. • Identify the advantages of outsourcing. • Cite the risks and limitations of outsourcing. • Develop the criteria necessary for managing the outsourcing relationship.

OUTSOURCING

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// OUTSOURCING Outsourcing refers to a contractual relationship for the provision of business services by an external provider. In other words, a company pays another company to do work for it. In HR, it means transferring high-volume transactional work from the HR department to an outside contractor. Currently, outsourcing is being promoted as one of the most powerful trends reshaping management. However, organizations have always outsourced some functions. For decades, most organizations hired firms to operate their cleaning or restaurant functions. One difference now is the scale. Firms are outsourcing everything from information technology management to entire functions such as human resources.

Outsourcing occurs when an organization contracts with another organization to provide services or products of a major function or activity.

Work that is traditionally done internally is shifted to an external provider, and the employees of the original organization are often transferred to the service provider. Outsourcing differs from alliances, partnerships, and joint ventures in that the flow of resources is one-way, from the provider to the user. Typically, there is no profit sharing or mutual contribution.

The second difference is that much of the work that is being contracted out is being done offshore (i.e., outside Canada) or outside the primary market. You have no doubt experienced this when you have called to get assistance with computer problems or credit questions. Now HR activities are being outsourced to India and other countries in order to lower costs and improve quality. This process is labelled HRO (HR offshoring).1 The impact of this trend in offshoring is described in HR Planning Notebook 13.1.

OUTSOURCING HR FUNCTIONS Surveys continue to show that nearly all organizations have outsourced parts of their HR functions.2 In 2010, about 60 percent of all large Canadian organizations outsourced some HR services.3 Currently, more organizations plan to outsource HR functions. For example, about 13 percent currently outsource HR administration, but 38 percent plan to do so.4 IBM outsourced its entire HR department, which was then called Workforce Solutions, a profit centre that produced gains in flexibility, accountability, competitiveness, and profitability.

Outsourcing A contractual relation- ship for the provision of business services by an external provider

In 2017, CIBC made the decision to outsource 130 jobs in its Finance Department to India. Employees are not only bitter about the job losses, but also angry that they are training other CIBC employees who then train the subcon- tractors in India. The company will save money because workers in India are paid less. CIBC made a profit of

Sources: Harris, Sophia. “Very depressing: CIBC staff losing jobs to workers in India: expected to help with training,” March 30, 2017, http://www.cbc.ca/ news/business/cibc-outsourcing-jobs-india-1.4045759. Retrieved September 7, 2017; E. Johnson, 2017, http://www.cbc.ca/news/business/td-bank- outsourcing-fraud-india-1.4362324. Retrieved October 24, 2017.

OUTSOURCING AT CANADIAN BANKS

$1.4 billion dollars in the quarter ending December 2017. A whistleblower at TD Bank told the press that TD was outsourcing its fraud investigation activities to centres in India. She was worried that customers did not know that all their confidential financial information might be at risk of a security breach.

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NEL 347CHAPTER 13 Outsourcing

What should an organization outsource? Activities most likely to be outsourced are as follows:

• Rule based • Repetitive • Frequently undertaken • Predictable • Able to be fully or partly automated by technology • Able to be delivered by remote sites5

Another way to determine if any HR activities are amenable to outsourcing is to consult the strategic importance as described in HR Planning Notebook 13.2.

HR PLANNING NOTEBOOK 13.1

THE IMPACT OF OFFSHORING IN INDIA

Many Western nations have outsourced activities to India because of the large English-speaking population, high levels of education (particularly in engineering and the sciences), the relatively calm political climate, an inde- pendent legal system that protects intellectual property, and cost efficiencies.

The scope of this activity has impacted the labour market in India. One growing trend is the reverse brain drain, in which Indian professionals, with foreign educa- tional credentials and work experiences, are returning to work in newly created positions. A second impact is the

increase in wage, by approximately 10 to 15 percent. Turn- over is high, contradicting the traditional view of Indian employees as loyal and deferential to authority.

These trends may impact the attractiveness of India for offshoring. Coupled with this are the emerging com- petitors based in Eastern Europe. For example, Montreal- based Bombardier outsourced its accounting function to Romania. The outsourcers in Romania compete not on wages, but on time zones and knowledge of many lan- guages. Emerging outsourcing companies include Iceland and Panama.

Sources: Adapted from S. Gopalan and R. Herring III, “Managing Emerging Outsourcing Trends: The Indian Experience,” Allied Academies International Conference. Academy for Studies in International Business Proceedings, Vol. 5, No. 2 (2005): 1–5; and A. Seno, “Offshoring Island,” Report on Business, The Globe and Mail, February 25, 2010, p. 26.

HR PLANNING NOTEBOOK 13.2

RANKING HR ACTIVITIES

Research suggests that HR activities can be grouped into seven hierarchical activities, according to strategic impor- tance, as follows: Level 1: Ancillary activities—food service, grounds maintenance Level 2: Routine activities—benefits administration Level 3: Economies of scale—administering personnel tests Level 4: Specialized knowledge—conducting HR surveys,

delivering a training course

Level 5: Specific organizational knowledge—succession management

Level 6: Highly confidential activities—layoffs, restructuring Level 7: Management decision activities—HR strategy,

structure HR activities in the first few levels are suitable for

outsourcing; those at the higher levels are not.

Source: Caruth, D. and Caruth, G. (2010). “Outsourcing Human Resource Activities: A Proposed Model,” Supervision 71 (7), pp. 3–8.

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In HR, the functions most likely to be outsourced are temporary staffing, payroll, training, recruiting, and benefits administration. HR Planning Notebook 13.3 lists the functions within HR that are likely to be outsourced. A new trend is to outsource absence management, because claims are complex, confidential, and require some degree of medical expertise.6

HR departments are under increasing pressure to produce deliverables, not just doables, and so are searching to determine which activities add value and who can best do these. Outsourcing is also a response to the demand from executives that HR reduce costs for its services. Outsourcing to service providers with international expertise also allows HR departments to harmonize employee packages for a global workforce, while complying with local laws.

HR PLANNING NOTEBOOK 13.3

HR FUNCTIONS THAT ARE OUTSOURCED

Compensation

• Payroll • Benefits • Compensation administration • Pension

Training

• Program delivery • Program design and development • Training consulting to line departments • Training needs analysis • Program evaluation • Strategic planning for training and development • Administration • Developing training policy

Recruitment and Selection

• Advertisements • Screening of applications • Testing • Reference checking • Preliminary interviews • Salary negotiations at the executive level • Exit interviews

Health and Safety

• Employee assistance programs • Wellness programs

While smaller firms might outsource all HR functions, most large firms retain the critical components. HR Planning Notebook 13.4 describes the reasons that small busi- nesses outsource HR. Larger organizations rarely engage in 100 percent outsourcing for three reasons. First, as has been argued throughout this text, the HR function is so critical to the culture and strategic objectives of an organization that it must be closely managed by the organization itself. The functions that are deemed most critical, such as recruitment, selection, and performance management, are rarely outsourced. Second, situations arise that are impossible to predict, such as industrial relations disputes, and this unpredict- ability makes it difficult to develop a contractual arrangement with a vendor; timeliness of response is crucial. Third is the lack of providers of total HRM services. The field of outsourcing is replete with hundreds of small companies specializing in market niches.

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NEL 349CHAPTER 13 Outsourcing

One company might do an excellent job of benefits counselling, and another might specialize in employee assistance, but few can do everything from training to managerial succession to payroll. These competencies have to reside within the firm.

// THE RATIONALE FOR OUTSOURCING Almost all organizations outsource, and the trend is growing. In a study conducted by Hewitt Associates, 94 percent of those surveyed said that they had outsourced one or more HR functions.7 CIBC’s decision to outsource is explained in HR Planning Today 13.1.

If the organization needs experts and cannot afford to hire or train them, outsourcing might be a solution. Most organizations want to achieve cost savings or improved ser- vices, or access to experts or technology, which serves as the basis for their decision to outsource. However, many managers approach outsourcing as a solution without first defining the problem.8

There are at least six major reasons that organizations outsource: financial savings, strategic focus, access to advanced technology, improved service levels, access to special- ized expertise, and organizational politics.

FINANCIAL SAVINGS The first reason cited for the outsourcing decision is to save money. Organizations believe that costs can be reduced by outsourcing a function such as payroll. A primary reason for lower costs is the lower salaries paid for offshore employees. For example, TELUS pays entry-level workers in the Philippines between $278 and $348 a month, about one-fifth of minimum wage in Canada.9 Economies of scale can be achieved when a provider, such as Ceridian, which specializes in benefits administration, concentrates on one area

HR PLANNING NOTEBOOK 13.4

SMALL BUSINESS AND HR OUTSOURCING

Most businesses do not hire an HR professional until the employee numbers reach about 100, or even 400. But legislated HR functions, such as payroll and benefits, are necessary for every organization, regard- less of size, so small businesses turn to other small businesses! specializing in HR. The advantages are the following:

• Lessens the handling of routine, transactional HR work (payroll) by in-house staff

• Offers access to experts who may provide advice in atypical situations (employee fraud)

• Provides the management of one-off services (such as computer training)

• Ensures that the company is complying with cur- rent legislation

• Allows access to technology platforms that are too expensive to develop in-house

Outsourcing is not the same as using consultants who may provide assistance on a project-by-project basis. Small businesses are looking for a long-term relationship with a provider that understands small business in general and their business in particular.

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Strategic Human Resources Planning NEL350

and provides this service to many corporations. Specialized vendors are more efficient, because they can spread the costs of training personnel and undertaking research and development across more users. Studies of outsourcing arrangements of at least two years’ duration showed that outsourcing resulted in cost savings ranging from 10 to 20 percent, with an average of 15 percent.10 About 50 percent of the firms believed that their cost savings objectives had been met, and that labour productivity had improved.

Related to the issue of saving money is cost control. Company users of a service might be more cautious when the contractor charges them for each service, as opposed to the “free” in-house service. Training is a good example. If in-house training is free and training provided by an external vendor costs $1000 per day, then managers are more stringent about requiring employees to prove that the training is needed and that there will be measurable benefits. Sometimes when an organization is just starting to offer a service, such as fitness training for employees, it is cheaper to contract this out than to make the capital investments in a gym and specialized staff. This capital can then be redirected to other initiatives that have a higher rate of return. Outsourcing also makes sense when usage of a service is variable or unpredictable. An organization may recruit on an irregular basis for IT staff; in this case, retaining an in-house IT recruiter is not economically viable.

HR PLANNING TODAY 13.1

OUTSOURCING AT CIBC

One of Canada’s largest companies outsourced major portions of its HR functions. CIBC employs about 44 000 people, about 450 of those in HR. In 2001, CIBC outsourced payroll processing, benefits administration, a call centre for employment enquiries, occupational health and safety services, and HR technology to a company specializing in HR services (EDS), in a seven-year, $227 million deal. Two hundred CIBC HR employees were transferred to EDS, cutting the bank’s HR department by nearly half. CIBC’s vice-president of HR commented, “I don’t think that in today’s world, power is about the number of employees you have working for you. HR should get its power from how much it helps the business units meet their goals.”

The reasons for outsourcing included the desire to improve service, increase automation, and have the HR department focus on the strategic issues of making a contribution to the company. CIBC does not add value by administering pension plans; EDS does. The HR depart- ment is freed from routine transactions and can focus on policy, providing advice and programs to move the business forward. The deal was made to help CIBC avoid

capital expenses updating its computer systems and to take the guesswork out of the HR annual budget. It also allowed CIBC to standardize the quality of the ser- vice. For example, calls to the centre are now answered within 20 seconds 90 percent of the time, which is an improvement over service levels when CIBC managed this function.

The CIBC–EDS deal was unique as an outsourcing arrangement for several reasons. CIBC arranged with EDS to introduce best practices back into its organization and to update the bank on industry trends on a regular basis. CIBC searched for a vendor that would be a cultural fit with its organization. The main attribute the bank was looking for was “adapting to client needs.” As the CIBC vice-president of strategic alliance management said, “You can’t put everything in a contract, so it is important to choose a company you can work with. You should be as clear as possible in terms of defining roles and responsi- bilities, but you cannot possibly think of all eventualities upfront.!.!.!.!It is important to have a process built into the contract to manage these issues.”

Sources: M. Rafter, “Promise Fulfilled,” Workforce Management, Vol. 84, No. 9 (September 2005): pp. 51–54; D. Brown, “CIBC HR Department Halved as Non-strategic Roles Outsourced,” Canadian HR Reporter, Vol. 14, No. 11 (2001): pp. 1, 6; and S. Geary and G. Coffey-Lewis, “Are You Ready to Outsource HR?” HR Professional, June/July 2002: pp. 26–29.

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STRATEGIC FOCUS Employers recognize that they cannot pursue excellence in all areas. Theodore Levitt, an American economist, said over half a century ago that “not a single company can afford to even try and be the first in everything.”11 Therefore, employers decide to focus on their core competency, such as customer service or innovation, and move secondary functions, such as benefits administration, to firms in which these functions are a core competency.

How is core defined? There are four meanings:12

• Activities traditionally performed internally • Activities critical to business success—core work contributes directly to the

bottom line; non-core work doesn’t • Activities creating current or potential competitive advantage • Activities that will influence future growth or rejuvenation

Non-core work is transactional work that is routine and standard and can easily be duplicated and replicated; core work is transformational and adds value to employees or customers.13 The notion of core competencies was created by Prahalad and Hamel, who argued that the real sources of competitive advantage were not products but man- agement’s ability to consolidate skills and technologies into competencies to adapt to changing circumstances.14 A competency is a combination of technology, management, and collective learning. For Nike, that core competency is product design, and the company outsources nearly everything else.15

Executives will decide to concentrate on what the organization does best, and con- tract everything else out to vendors. Core functions that should not be outsourced are orientation, leadership development, employee relations, final selection, performance management, succession management, and organizational change, as these depend on an understanding of organizational culture, a long-term orientation, consistency, trust, and confidential information. For example, in high-tech firms, the speed of the changes in businesses means that vendors will not have the specialized skills in coaching to develop the next generation of leaders. Microsoft creates opportunities in a process that encourages employees to improve their coaching skills and develop relationships within the organization.16

By outsourcing non-core activities, managers hope to be able to focus on value-added roles. For example, CIBC outsourced the design of training programs and development and delivery, allowing the company to focus on planning, needs analyses, and coaching after program completion.17 Companies that did outsource reported that they reduced administrative tasks by more than half and increased their strategic focus by 40 percent.18 Avenor Inc. of Montreal outsourced all pensions, benefits, and payroll administration. As James Merchant, vice-president of HR at Avenor, explained:

Outsourcing allowed us to get out of low value-added administrative work and become more strategic. We now focus on health and safety, leader- ship development, total compensation, and employee and labour relations. Our department at head office has 12 staff today compared to 40 in 1994. But, with our change in focus, our performance within the organization has taken a quantum leap.19

The best advice is to outsource transactions and insource transformations.20

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ADVANCED TECHNOLOGY Another driver of the out- sourcing trend has been technology. Many functions are outsourced because orga- nizations want to improve technical service, they cannot find technical talent, or they need quick and reliable access to new technologies.21 Much of traditional HR service has involved answering employee inquiries about benefits or making changes to employee files. These kinds of tasks can be handled easily by interac-

tive voice responses and managed by companies that specialize in this service. Tech- nology also enables a company to reduce transaction time (the time it takes to handle a request). Outsourcing vendors can also provide more flexible technology, and new solutions such as mobile, on-demand and zero carbon footprint.22

IMPROVED SERVICE Quality improvement is cited as another benefit of outsourcing. Performance stan- dards can be written into the contract more tightly than may be possible with current and long-tenured employees. Managers can choose the “best-of-breed” vendors that have outstanding track records and more flexibility in hiring and rewarding their employees.

HR departments are often criticized for being overly bureaucratic. When using a service provider whose focus is service, clients of HR see a marked improvement in flexibility, response, and performance. Indeed, most HR directors value service accuracy and reliability more than cost savings.23 Most firms gain control of their service levels because their outsourcing agreement can quantify deliverables in the contract.24

Confidentiality is also a good reason to outsource. An employee with a drinking problem, for example, is more likely to seek assistance from an external counsellor than an in-house employee assistance officer.

SPECIALIZED EXPERTISE Another reason cited by some companies for outsourcing is that they find the laws and regulations governing HR so complex that they decide to outsource to firms that have the specific expertise required. The motto is “Outsource when somebody can do it better than you.” For example, some firms rarely conduct executive searches, so it makes sense to hire executive search consultants rather than employ a recruiter specialist.

Employees who are outsourced to the service provider may see opportunities for career development in their disciplines. In an organization specializing in training,

Some organizations outsource to access advanced technology.

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for example, employees would have greater access to expert colleagues to use them as sounding boards, and to career paths and opportunities to upgrade their knowledge and skills.

The use of experts also reduces the risks and liabilities for organizations. Specialists know the legislation better than anyone and can assure the user organization that all their practices comply with legislation.

Interestingly, a recent study by Deloitte about outsourcing practices found that companies want not only access to expertise, but also this expertise to be leading edge and innovative—creating opportunities for improvements. About one-third of companies surveyed indicated that they evaluate service providers on their ability to innovate in order to improve service and profits.25

ORGANIZATIONAL POLITICS An outsourced function is not as visible as an in-house department performing the same tasks. Some organizations make the decision to outsource to get rid of a trouble- some department, such as one where employees are underperforming. Outsourcing a function also reduces the head count. Head counts are important in the public sector; the fewer civil servants on payroll, the happier the tax-paying public. Orga- nizations that outsource achieve a ratio of 1:231 (one HR person to 231 employees) in contrast to the traditional 1:100.26 The contractor is often able to justify and negotiate technology improvements and other investments more easily than in-house managers. At United Kitchen, a company that outsourced all training, the goal was to buy an expert who could maintain an objective view and not get embroiled in office politics.27

BENEFITS TO CANADA Outsourcing to foreign countries (offshoring) is often viewed negatively by Canadians, as it often results in the loss of jobs in Canada. Yet one economist argues that while some jobs may be lost, most Canadians benefit by lower costs of consumer goods. Canadian incomes have also benefited by the productivity gains achieved through global compe- tition, which includes offshoring, accounting for one-tenth of our GDP growth. Also, others argue that Canada is helping to alleviate world poverty by employing millions of workers through outsourcing arrangements, doing more than can be achieved through humanitarian aid.28 For example, in 2016, outsourcing work accounted for 1.8 million jobs, about 4 percent of all jobs in the Philippines.29

// RISKS AND LIMITATIONS OF OUTSOURCING As with any major decision, there are positives and negatives to outsourcing. The deci- sion to outsource carries risks and has limitations. Are the anticipated benefits realized? What are the risks to service levels? What is the effect on employee morale? Are there security risks in outsourcing? Does outsourcing reduce the value of the organization? These four questions are discussed below.

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PROJECTED BENEFITS VERSUS ACTUAL BENEFITS For organizations with experience in outsourcing functions, there are hints that the process is not as cost-effective and problem-free as expected. Surveys have indicated that about half of the respondents found that it was more expensive to manage the outsourced activity than originally expected and that service levels were not as good as expected.30 The extensive effort required by management to manage the outsourced activity is seen by some as the largest hidden cost of outsourcing.31 According to one survey, about 80 percent of outsourced customer service agreements don’t reduce overall costs.32 About 40 percent reported problems with higher costs than forecasted. The reasons for the cost overrides include system incompatibilities and client demands outside the standard vendor package. Interestingly, one study found that about one- quarter of HR staff time was still spent on benefits administration, which had been outsourced (e.g., addressing problems that the outsourcing company could not handle or mishandled with employees). Worse, half of this routine work was being done by the wrong people: senior specialists and managers.33 Outsourcing compares poorly to other processes designed to save costs. For example, re-engineering can generate cost savings over 50 percent; outsourcing savings seem to be, on average, 10 to 15 percent.34 Over 30 percent of outsourcing arrangements were not renewed because the cost sav- ings were not achieved.35

SERVICE RISKS The vendor will provide services as specified in the contract. If the needs of the user organization change, contracts will have to change. The flexibility of adding new features or enhancing or reducing service is lessened, once the organization is totally dependent on the supplier, having lost all its organizational specialists.36 Furthermore, it is possible that the vendor may enter the market and become a competitor. For example, Schwinn, a U.S. manufacturer of bicycles, outsourced the manufacture of its bicycle frames to a Taiwanese organization, Giant Manufacturing. A few years later, Giant entered the bicycle market and damaged Schwinn’s business. Companies can lessen this risk by erecting strategic blocks—terms in the contract that limit the replication of certain competitive advantages, such as propriety technology—or spreading the outsourcing among many vendors. There might be problems too, with a disruption of service. A strike at Heathrow Airport that left 70 000 passengers stranded was a direct result of a labour relations problem with the outsourcing supplier that British Airways had con- tracted to do the catering. The public relations nightmare was for British Airways, not the catering company.37 Other service risks include the substitution of cheaper parts or tainted products, resulting in expensive recalls.

An SHRM survey found that about 25 percent of respondents reported a decrease in customer service compared with the in-house service and a less personal relationship with its own employees.38

EMPLOYEE MORALE One of the primary risks in outsourcing is the effect on employee morale and per- formance.39 Outsourcing is a form of restructuring that always results in displaced employees. Organizations provide employees with a sense of identification and feelings of security and belonging. When these are disrupted, employees, as stakeholders, may

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NEL 355CHAPTER 13 Outsourcing

feel resentful and retaliatory. About one-third of HR professionals resist outsourcing because they worry about the risk of losing their jobs, or about being forced to work for a vendor, and fear that management believes that outsiders are more competent.40

In an outsourcing arrangement, employees are transferred to the outsourcing firm, transferred internally to other functions, outplaced, and/or offered voluntary retirements. Despite all these options, redundancies and layoffs of staff do occur. In certain cases, the service provider employs the entire displaced workforce but may negotiate higher fees to accommodate what is perceived to be surplus or inefficient labour. Employees are resentful of these arrangements, with their connotations of “serfdom” in which the “serfs” are sold as capital equipment.41

Outsourcing can lead to the disintegration of an organization’s culture. Consider that customers’ perceptions of service are directly impacted by the level of organizational com- mitment of employees; therefore, damaging that commitment may result in lower service levels. Instead of empowering and valuing employees, an outsourcing decision alienates and “de-skills” employees. The transferred employees will experience emotional loss and a change in culture. The outsourced function might have served as a developmental site for managers, and this is now lost unless arrangements can be made with the vendor.

In most cases, negotiated arrangements of pay and job security are not transferable. The vendor is able to offer cost savings because of reduced wages and increased work intensity.42

Organizations that attempt to outsource face a backlash. Outsourcing Canadian jobs has resulted in public relations nightmares for companies, as discussed in HR Planning Today 13.2.

Once rumours of outsourcing arrangements are started, HR managers can expect talented employees to start job searches and all employees to suffer anxiety resulting

HR PLANNING TODAY 13.2

OUTSOURCING BACKLASH

Two highly publicized cases have made Canadians stop to think about the consequences of outsourcing. In 2013, an eight-storey garment factory in Bangladesh collapsed, killing more than 1000 workers. Consumers began asking store representatives about the origin of the clothes on the shelves and what these companies were doing to protect workers. The standard response was that the companies did not know what suppliers were doing and should not be held responsible. But others argue that it is part of any organization’s corporate social responsi- bility to ensure that their products are manufactured in conditions where workers are treated fairly. To ensure that this happens, some companies like Loblaws, seller of Joe Fresh clothing manufactured in Bangladesh, have

signed a legally binding document to improve safety in manufacturing sites.

In the same year, RBC was forced to issue a public apology when it was revealed that it was hiring foreign workers when Canadians (and current employees) were capable of performing the work. Large unions threatened to pull their funds from the bank, as did many individual clients. In response to much negative media attention, RBC became the first to write a code of conduct that favours hiring Canadian workers and limits the types of jobs that it outsources. The bank will no longer outsource when the primary reason is cost cutting, but only when the invest- ment in scale, technology or operational knowledge pro- vides better skills sets.

Sources: Eldridge, A. (2013). “Supply Change: Factory Collapse Puts Outsourcing of Labour into the Spotlight,” Alberta Venture, September 14, 2013, p. 1.; and Kiladze, T and Marotte, B. (2013). “RBC Announces Tough New Rules on Outsourcing,” The Globe and Mail, May 24, 2013, p. 8.

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in lost production. Managers will have to deal with the reac- tions of displaced employees and survivors and allow for a period of mourning.

SECURITY RISKS There is always a risk of infor- mation being leaked. This is particularly important in com- panies concerned with intel- lectual property rights. For HR, the major information risk is the loss of personnel

information (employee confidential data).43 Much of this information, such as perfor- mance and medical histories, is very sensitive.44 The Privacy Commissioner of Canada has said that PIPEDA (the Personal Information Protection and Electronic Documents Act) does not prohibit the use of foreign-based service providers, but organizations should warn their clients that some foreign governments may have lawful access to their information.45

REDUCED VALUE Extreme levels of outsourcing hollow out a company, leaving it a shell. There may be unintended consequences of outsourcing the organization’s knowledge and skills to outsiders. The vendor may even sell the acquired know-how and company secrets to a competitor. An organization can find that outsourcing employees’ skills limits the organization’s ability to learn and exploit changes. More troublesome is the emerging research, which suggests that outsourcing an activity deemed to be routine and of low value did not result in the remaining HR staff becoming focusing on more “strategic” or higher-value work.46

The organization may experience a reduced capacity to generate profits or inno- vate. Even a non-core activity, such as IT, may be tightly linked to other functions such as HR, so outsourcing IT reduces the firm’s capability for cross-functional synergies and creativity. The vendor cannot know an organization’s special needs, nor can it distinguish a high-profile customer (the president of the company that outsourced the function) from any other customer. When HR functions are outsourced, the internal image of HR may deteriorate as there is less interaction with internal customers and less and less HR work is performed by the HR department.47 Indeed, one study found those organizations in which HR was partially outsourced resulted in an increased focus on cost cutting, and not an increased strategic role. Those companies that did not outsource HR had HR departments actively engaged in the business of the organiza- tion, and their HR managers developed competences that earned the trust and respect of senior executives.48

Even with these risks and limitations, it is estimated that only 1 to 20 percent of outsourced HR functions have been brought back in-house.49

Consumers expect companies to be concerned about working conditions in their outsourcing arrangements.

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// MANAGEMENT OF OUTSOURCING Managing the outsourcing well is critical. First, outsourcing must be subjected to a cost– benefit analysis. Can the contractor do a better job, faster, while maintaining service levels and meeting legislative requirements? How will this be measured? HR Planning Notebook 13.5 suggests a number of ways that organizations can prepare for outsourcing.

The following sections describe ways of selecting vendors, negotiating the contract, and monitoring the arrangement.

HR PLANNING NOTEBOOK 13.5

PREPARING FOR OUTSOURCING

In order to maximize the benefits from an outsourcing arrangement, some experts suggest that organizations complete the following tasks in preparation for moving to an outsourcing arrangement:

• Develop meaningful benchmarks and data: Unless you know the in-house costs of managing, for example, benefits administration, you will not know whether the vendor relationship will result in cost savings. Of course, service levels also have to be measured and quantified to provide a baseline for negotiations with the vendor to achieve service- level improvements. These two types of measures will enable you to develop a business case.

• Develop change management skills: Outsourcing any part of HR requires expertise in change man- agement. Employees’ lives will be transformed, and this transformation has to be carefully managed.

• Develop contract and performance management skills: Most HR departments have little experience with negotiating and managing large contracts.

There are two models for managing these out- sourcing contracts. The first is to establish a dedi- cated vendor management unit. For example, the Development Bank of Singapore was managing 600 outsourcing contracts and found that this approach was inefficient. It established a centralized vendor management group, which developed the service agreements, compiled data, and monitored the ven- dors. Another model is to use a cross-functional team. The purchasing group might negotiate the contract while the HR group would manage the day-to-day monitoring. Basically, whatever model is used, subject-matter expertise and supplier man- agement skills are needed.

• Develop communication channels and skills: The quality of communication can determine the suc- cess or failure of an outsourcing arrangement. A study of 100 outsourcing deals suggests that face-to-face conversations were the most effec- tive communication channel.

Sources: Adapted from Human Resource Outsourcing Association, “HR Service Delivery in the Federal Government: Are You Sourcing Ready?” www.hroassociation.org/file, retrieved on September 15, 2008; S. Khanna and J. Randolph, “An HR Planning Model for Outsourcing,” Human Resource Planning, Vol. 28, No. 4 (December 2005): 37; and N. Kasraie and N. Cline, “Communication as a Key to Success in Outsourcing: A Survey of the Top 100 Outsourcing Companies in the World,” World Journal of Social Sciences, Vol. 1, No. 1 (March 2011): 200–211.

SELECTING THE VENDOR Once a decision is made to explore outsourcing a function, the organization should:

• Inform the staff of the affected function • Prepare a request for proposal (RFP) • Invite internal and external bids • Establish a team to evaluate these bids

Request for proposal (RFP) Describes the responsi- bilities to be outsourced and invites potential providers to present their proposal for car- rying out the job

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See HR Planning Notebook 13.6 for a summary of the key information that should be contained in a response to an RFP. If more than one HR activity is to be outsourced, the organization has to decide if it wants one provider to undertake all the activities or work with specialized providers (best in class) for each activity. When asked in a survey, about 60 percent of HR managers polled preferred to work with one provider of multiple services.50

The point at which the staff should be informed about the potential outsourcing is hotly debated. If informed early in the process, the most talented and marketable employees might leave sooner rather than later, and the stress and anxiety among those remaining affect productivity from that point on. However, in any case employees will usually find out earlier than management might like, and it is far better to keep them in the loop; they might even play a vital role in the development of the RFP.

The items to be included in an RFP vary by the service to be outsourced. Typical details include activity levels, errors, response rates, deliverables, and goals.51 Costs are never included. Some organizations even include a clause preventing the outsourcer from outsourcing to another supplier because of situations where a safe factory outsourced work to an unsafe factory.

Companies that have had successful outsourcing arrangements started by comparing vendor bids against bids newly submitted by in-house functional experts.52 The internal group might have had ideas all along to reduce costs or improve services, but might have been thwarted for any of a variety of reasons. Once it is clear that outsourcing is the preferred route because the same service cannot be provided in-house, the organization can proceed with its outsourcing plans, assured that every avenue has been explored.

HR PLANNING NOTEBOOK 13.6

RESPONSE REQUIREMENTS TO A REQUEST FOR PROPOSAL FOR OUTSOURCING

In a response to a request for proposal, the potential pro- vider should do the following:

• Explain how the provider is uniquely qualified to accomplish the measurable objectives that are described in the request.

• Describe actual situations in which the provider is currently providing the services that are proposed for this operation.

• Identify the challenges that the provider expects to encounter while improving the operation.

• Explain how these challenges will be met and present a proposed timetable for meeting them.

• Describe the economic model that is proposed for the operation.

• Specify the fee that the provider believes to be reasonable compensation for its services.

Source: L. Moneta and W.L. Dillion, “Strategies for Effective Outsourcing,” New Directions for Student Services, No. 96 (Winter 2001) (Malden, MA: John Wiley & Sons), p. 42. © 2002. Reprinted with permission of John Wiley & Sons, Inc.

The evaluation team should include the technical experts, including a manager who will not be affected by the outcome, procurement officers who can qualify suppliers, and even customers who can check out the suppliers’ track records and personnel.53 This team sets the evaluation criteria, analyzes bids against the criteria, and chooses the vendor. The process should be as obsessive and detailed as the due diligence undertaken with mergers and acquisitions. Examples of evaluation criteria can be found in HR Planning Today 13.3.

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NEGOTIATING THE CONTRACT Experts advise organizations looking to outsource not to work with the contract the vendor will offer, because these contracts typically do not include performance standards or penalty clauses if the vendor does not meet requirements.54 Payment provisions in these standardized contracts also tend to favour the vendor. The vendor also has a tendency to want to start the service before the contract is signed and “take care of the details later.” Anything not provided at the beginning is then subject to excess fees.

An essential first step that the user organization must undertake is the establish- ment of benchmark levels with current services. When managers with experience in outsourcing HR functions were asked what they would do differently, about half said

HR PLANNING TODAY 13.3

CRITERIA FOR EVALUATING POTENTIAL OUTSOURCERS

Companies look at the following criteria in their evaluations:

• HR process expertise • Prior experience and track records • Financial stability • Service-level agreements in the contracts and

compatibility of standardization

• Leading-edge technology and commitment to invest in more

• Cultural compatibility • Readiness to invest in transition management

Sources: I. Hunter, “Outsourcing: The Business Model for the New Millennium,” Training Journal, September 2007, pp. 26–32; K. Gurchiak, “Record Growth in Outsourcing of HR Functions,” HR Magazine, Vol. 50, No. 6 (June 2005): 35–36; and M. Milgate, Alliances, Outsourcing, and the Lean Organization, © 2001 Michael Milgate.

Contracts typically include standards of service and quality.

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MONITORING THE ARRANGEMENT The most frequent causes of outsourcing problems, according to a study conducted by the Centre for Outsourcing Research and Education, are as follows:58

• Poor service definition: The outsourced project or function must be clearly defined. If the terms are fuzzy, however, the contractor might be invited to brainstorm and help generate the guidelines and standards.59 The work is managed by results—in other words, there are targets or objectives such as “All calls answered within 90 seconds”—not necessarily by time expended to generate the results.

• Weak management processes: A person needs to be assigned to monitor that the results are as expected; in complex arrangements, it might take a team, called the stay-back team, to do this monitoring.

HR PLANNING TODAY 13.4

NEGOTIATING SERVICE OUTCOMES

SaskCentral is a cooperative that supports credit unions in Saskatchewan. In deciding to outsource the payroll func- tion, SaskCentral was looking for a supplier that would guarantee accuracy and be compliant with legislation governing compensation. Responsiveness was another critical criterion as SaskCentral’s culture had always been

customer oriented, and errors were fixed quickly by simply going to the HR specialist. Although cost savings and enabling HR personnel to focus more on strategic func- tions were important reasons to outsource, the outcomes of accuracy, currency with legislation, and responsiveness were the important deliverables.

Sources: www.SaskCentral.com; and Anonymous, “Thoughts on Outsourcing,” Canadian HR Reporter, Vol. 23, No. 2 (January 25, 2010): pp. 19–23.

that they would define service levels that aligned more clearly with business objectives.55 The goal is to document baseline services currently being provided, using criteria such as response time, response cost, and customer satisfaction ratings. Thus, a performance standard might read that “90 percent of benefits enquiries must be answered within 24 hours.” Of course, everyone forgets about the other 10 percent, so that too has to be specified (e.g., “The remaining 10 percent must be answered within three working days”). Economies of scale work only when the programs are standardized and have few exceptions. So the client must be ready to minimize exceptions that complicate or slow down the process.56 Quality measures have to be included; for example, “Clients rate the service satisfactory or excellent 98 percent of the time.” The most common service-level agreements are transaction accuracy, data delivery, service availability, issue resolution, and client satisfaction.57 Failure to meet these levels must result in penalties, such as reduction in the costs or payments to the user. On the other hand, if service is superior, incentives should be built into the contract. It might be necessary to include clauses for severe fluctuations in demand. Finally, any contract should include a termination clause.

The negotiations tend to be unbalanced, with the vendor having employed many technical and legal experts in order to prepare the agreement. The user organizations should do likewise and hire an expert to protect its interests. A technical expert can help develop performance standards, and a legal expert ensures that the customer’s wishes are expressed in the contract. Read how SaskCentral built service requirements into its negotiations in HR Planning Today 13.4.

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A list of issues that companies are experiencing with the outsourcing providers is given in HR Planning Notebook 13.7.

A relationship with the firm must be established to ensure that the supplier acts in the firm’s best interests and has knowledge of its unique needs. References have to be checked, just as when hiring any employee. Organizations should demand frequent and accurate reporting. In a United Kingdom survey on outsourcing, most HR man- agers were dissatisfied with the frequency and quality of the communication from the supplier.60 Internal and external client satisfaction surveys should be conducted. Some companies negotiate the right to monitor calls in real time.

When outsourcing is managed according to these guidelines, organizations can maximize its benefits and mitigate the risks. A typical Fortune 500 company might have 10 000 suppliers to help it meet its business objectives.

The effective management of outsourced relationships, normally the role of the procurement department, is a skill set that HR departments need. It might be argued that organizations that invest in this skill set will have an advantage over their competitors.61 Those with experience in this area find it easier to train HR professionals in supplier management than to train those in the procurement department in HR.62

HR PLANNING NOTEBOOK 13.7

ISSUES COMPANIES FACE WITH OUTSOURCING PROVIDERS

A recent survey asked respondents to identify the issues faced by them with their outsourcing providers and here are their responses.

Companies have dealt with these issues by increasing their skill levels in vendor management relationships.

Reactive vs proactive

0% 10% 20% 30% 40% 50% 60%

Poor service quality

Lack of innovation

Lack of responsiveness

Failure to meet service levels

Ineffective issue resolution

Communication barriers

Poor quality of relationship

High service provider attrition

Too costly

Incompatible culture

Source: Taken from Deloitte’s 2014 Global Outsourcing and Insourcing Survey, December 2014, https://www2.deloitte.com/content/dam/Deloitte/ us/Documents/strategy/us-2014-global-outsourcing-insourcing-survey-report-123114.pdf.

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POLICY OPTIONS TO LIMIT OUTSOURCING As you read earlier, RBC drafted an outsourcing code of conduct to not outsource when the only rationale was cost savings. However, is there something that governments should be doing to protect Canadian jobs that are being eliminated? Some reactive policies that will not work to restrict the use of outsourcing include trade restrictions, industrial targeting, or buy-Canadian procurement programs. Some policies that may work include labelling that identifies the country of origin, and tax incentives to manufacture in Canada. However these are short term and limited. Longer-term policies that increase investment in education to increase our intellectual capital (i.e., so we can compete on ideas not labour costs) may work. A different way to compete with low-cost countries is to invest in research and innovative ways to manufacture, which should then result in lower costs.63

Until the full costs of outsourcing are understood, there will be continued debates about its value.

// SUMMARY Outsourcing refers to the contractual arrangement wherein one organization provides services or products to another. There is a growing trend to outsource HR functions. The advantages of outsourcing include the reduction of costs; the increased energy and time to focus on an organization’s core competencies; access to technology and specialized expertise, both of which result in increased levels of service; and the political advantages of removing a troublesome function or reducing headcount. But there are disadvantages: the anticipated benefits might not be realized; service levels might decrease; and employee morale and commitment, as well as the value of the organiza- tion, might decrease. Managing the contractual arrangement with the service provider is the key to optimizing the benefits and minimizing the risks.

KEY TERMS outsourcing p. 346 request for proposal (RFP) p. 357

DISCUSSION QUESTIONS 1. We buy the cheap T-shirts and television sets and also worry about all the jobs

losses in Canada. The outsourcing of jobs to other countries (offshoring) results in positive and negative consequences for Canadians. In groups, prepare lists of the consequences of outsourcing.

2. Canadians have experienced several strikes over outsourcing. Identify them and focus on a recent strike. Analyze the media reports, and consult the employer and union websites to determine the perspectives of each on the issue of outsourcing. Have one team prepare the arguments against outsourcing from the union perspec- tive; have another group prepare the arguments for outsourcing from the employer’s perspective. Have each group write a two-page message to be given to the media.

3. Martyn Hart, Chair of the National Outsourcing Association, has stated, “One of the most notable aspects of outsourcing is that people rarely like to talk about suc- cess stories. The truth is, thousands of companies outsource successfully each year,

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but it’s worth remembering that each and every outsourcing deal is only as good as the planning that proceeds it.”64 Outline the steps that an organization should follow when deciding to outsource an HR activity.

EXERCISE 1. Using the hierarchy in HR Planning Notebook 13.2, list all HR activities in a normal

HR department at the appropriate activity level. For those activities in the first three levels, find HR service vendors/providers to whom these could be outsourced. Take two examples, and compare two to three vendors’ information on their websites. Choose one and explain why you would outsource to this vendor.

// REFERENCES 1. Pereira, V. and V. Anderson. 2012. “A Longitudinal Examination of HRM in

a Human Resources Offshoring (HRO) Organization Operating from India.” Journal of World Business, Vol. 47: 223–231.

CASE STUDY OUTSOURCING AT TEXAS INSTRUMENTS CANADA

Dawn McWhirter, CHRP, is the HR manager at Texas Instruments (TI) Canada. TI Canada outsourced its payroll function to a national provider but, faced with a large number of transaction errors, Dawn is crunching the numbers to determine whether it makes more sense to have payroll provided by staff internal to Texas Instruments.

The current external provider is paid $30 000 annually to prepare biweekly payroll inputs/changes, additions/terminations, ad hoc payments (such as com- missions and bonuses), car allowances, mileage reimbursements, and so on, plus pay-slip printouts, tax remittances, and T4s. However, so many errors are made that Dawn has to pay an administrator $37 440 annually to correct mistakes and liaise with the provider. As well, the employees at headquarters in Dallas are also spending time correcting these errors for an additional cost of $12 000 annually. Dawn estimates that she is spending about 100 hours a year overseeing the errors and auditing quarterly reports for a cost of about $3400.

To provide these same services internally, Dawn prepared the following estimates:

• New national provider: $4000 annually for partial in-house—all biweekly payroll changes/additions would be input on-site using a secure web portal provided by the carrier; the new provider would be responsible only for printing pay slips, remitting taxes to government agencies, and preparing year-end filings such as T4 remittances.

• Administrator: $37 440. • Auditing: $3400.

Correspondence with Dawn McWhirter, HR Manager, Texas Instruments Canada, October, 2008.

QUESTIONS 1. If you were Dawn, what decision would you make and why? 2. What are the advantages and disadvantages of the decision that you made?

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2. Gurchiek, K. 2005. “Record Growth in Outsourcing of HR Functions.” HR Magazine, Vol. 50, No. 6: 35–36.

3. Potvin, J.F. 2010. “Out and About.” Benefits Canada, Vol. 34, No. 11: 45–46. 4. Deloitte’s 2014 Global Outsourcing and Insourcing Survey. https://www2.deloitte.

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24. Cooke, B. 2004. “HR Benefits Outsourcing: Updating the Conventional Thinking.” Employee Benefit Plan Review, Vol. 58, No. 8: 18–22.

25. “Everything you need to know about Deloitte’s 2016/17 Global Outsourcing Survey.” http://www.power-net-com.au/blog/everything-you-need-to-know-about- Deloitte’s-2016/17-Global-Outsourcing-Survey. Retrieved September 9, 2017.

26. Oshima et al. 2005. 27. Cooke, F.L., J. Shen, and A. McBride. 2005. “Outsourcing HR as a Com-

petitive Strategy? A Literature Review and an Assessment of Implications.” Human Resource Management, Vol. 44, No. 4 (Winter): 413–432.

28. Trefler, D. 2006. “Canadian Policy Responses to Offshore Outsourcing.” Conference sponsored by Industry Canada and the Rotman School of Management, October.

29. Lopez, D.P., and K.L.M. Yap. “Donald Trump Has Philippine Call Centres Worried.” Bloomberg News (March 9, 2017). https://www.bloomberg.com/ news/articles/2017-03-10/trump-risk-prompts-philippine-call-centers-to-seek- lobbyist?cmpid=socialflow-twitter-business&utm_content=business&utm_ campaign=socialflow-organic&utm_source=twitter&utm_medium=social. Retrieved March 14, 2018.

30. Albertson, D. 2000. “Outsourcing Shows Limited Impact for Strategic HR.” Employee Benefit News, Vol. 14, No. 10: 70.

31. Luvison, D., and M. Bendixen. 2010. “The Behavioural Consequences of Outsourcing: Looking Through the Lens of Paradox.” Journal of Applied Management and Entrepreneurship, Vol. 15, No. 4 (December 2010): 28–52.

32. Anonymous. 2005. “Why Outsourcing Succeeds or Not.” HR Focus, Vol. 82, No. 7 (July): 1, 3.

33. Rison, R.P., and J. Tower. 2005. “How to Reduce the Cost of HR and Con- tinue to Provide Value.” Human Resource Planning, Vol. 28, No. 1: 14–18.

34. Bryce, D.J., and M. Useem. 1998. “The Impact of Corporate Outsourcing on Company Value.” European Management Journal, Vol. 16, No. 6: 635–643.

35. Geary, S., and G. Coffey-Lewis. 2002. “Are You Ready to Outsource HR?” HR Professional, Vol. 19, No. 3 (June/July): 26–29.

36. Klass, B.S. 2008. “Outsourcing and the HR Function: An Examination of Trends and Developments Within North American Firms.” The International Journal of Human Resource Management, Vol. 19, No. 8: 1500–1514.

37. Khanna, S., and J. Randolph. 2005. “An HR Planning Model for Outsourcing.” Human Resource Planning, Vol. 28, No. 4 (December): 37.

38. Lilly, J.D., D.A. Gray, and M. Virick. 2005. “Outsourcing the Human Resources Function: Environmental and Organizational Characteristics That Affect HR Performance.” Journal of Business Strategies, Vol. 22, No. 1: 55–74.

39. Elmuti, D., and Y. Kathawala. 2000. “The Effects of Global Outsourcing Strategies on Participants’ Attitudes and Organizational Effectiveness.” International Journal of Manpower, Vol. 21, No. 2: 112–128.

40. Babcock, P. 2004. “Slicing Off Pieces of HR.” HR Magazine, Vol. 49, No. 7: 70–76; Sullivan, J. 2004. “The Case Against Outsourcing.” Canadian HR Reporter, Vol. 17, No. 3: 15.

41. “Outsourcing and the Implications for Human Resource Development.” Journal of Management Development, Vol. 19, No. 8 (2000): 694–699.

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42. Bryce and Useem. 1998. 43. Khan, S., M. Niazi, and R. Ahmad. 2011. “Barriers in the Selection of Off-

shore Software Development Outsourcing Vendors: An Exploratory Study Using a Systematic Literature Review.” Information and Software Technology, Vol. 53, No. 7: 693. Retrieved June 27, 2011, from ABI/INFORM Global.

44. Coles, D. 2013. “Sending Jobs Offshore Hurts Canadian Workers.” Times Columnist. April 11, 2013. http://www.timescolonist.com/opinion/op-ed/ comment-sending-jobs-offshore-hurts-canadian-workers-1.108110. Retrieved May 13, 2013. Pages 1, 2.

45. “Outsourcing by Canadian Companies: Another Look at the USA Patriot Act. January 30, 2013. http://www.ipblog.ca/?p=702. Retrieved March 16, 2015.

46. Woodall, J., M. Gurney, T. Newham, and W. Scott-Jackson. 2009. “Making the Decision to Outsource Human Resources.” Personnel Review, Vol. 38, No. 3: 236–248.

47. Sullivan, J. 2002. “The Case Against Outsourcing.” IHRIM Journal (July): 38–41. 48. Glaiser, A.J. 2014. “HR Outsourcing: The Impact on HR Role, Competency

Development and Relationships.” Human Resource Management Journal, Vol. 24, No. 2 (April): 211.

49. Gurchiek. 2005; Pollitt, D. 2004. “Outsourcing HR: The Contrasting Experiences of Amex and DuPont.” Human Resource Management, Vol. 12, No. 6: 8–10.

50. Potvin, J.-F. 2010. “Out and About.” Benefits Canada, Vol. 34, No. 11: 45–46. 51. The Economist Intelligence Unit. 1995. New Directions in Finance: Strategic

Outsourcing. New York: The Economist Intelligence Unit. 52. LaCity and Hirschheim. 1995. 53. Laabs, J. 2000. “Are You Ready to Outsource Staffing?” Workforce, Vol. 70,

No. 4: 56–60. 54. LaCity and Hirschheim. 1995. 55. Gray, R. 2009. “How Far Should Outsourcing Go?” Human Resources

(July 2008): 33–36. 56. Anonymous. 2007. “How to Maximize Your Return on Outsourcing and

Shared Services.” HR Focus, April, Vol. 84, No. 4: S2. 57. Gurchiek. 2005. 58. Simke, J. 2007. “When Outsourcing Fails to Deliver.” Canadian HR Reporter,

Vol. 20, No. 9 (May 7): 19. 59. Petrick, A.E. 1996. “The Fine Art of Outsourcing.” Association Management

(December): 42–48. 60. Gray, R. 2009. “How Much Should You Give Up?” Human Resources

(November): 28–31. 61. Luvison and Bendixen. 2010. 62. Saunders, J. 2007. “After the Deal Is Done.” Personnel Today (October 23):

20–23. 63. Trefler, D. 2005. “Policy Responses to the New Offshoring: Think Globally, Invest

Locally.” Industry Canada Working Paper No 2006-01. Ottawa, Industry Canada. 64. Gray, R. 2010. “Great Expectations.” Human Resources (November): 56–58.

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NEL

CHAPTER

CHAPTER LEARNING OUTCOMES AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Understand the importance of measuring the effectiveness of HRM activities through workforce analytics.

• Outline five aspects of HRM that can be evaluated using the 5C model for measuring effectiveness: compliance with laws and regulations, client satisfac- tion, culture management to influence employee attitudes, cost control of the labour component of the budget, and the contribution of HR programs.

• Discuss methods of assessment, such as cost–benefit analysis, utility analysis, and auditing techniques.

• Identify the challenges in measuring HR activities and determine the metrics that are important to the stakeholders in organizations.

HR ASSESSMENT AND ANALYTICS

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Aligning HRM programs and policies with organizational goals is the beginning of the strategic HR planning process. Assessing whether these policies and practices were effective is the end of one cycle in the planning process, because HR professionals need to know how their programs and policies are performing.

// WORKFORCE ANALYTICS Corporate scorekeeping allows organizations to make the adjustments necessary to reach their goals. The scorecard, with its measures of key indicators, focuses managers’ and employees’ attention on what is important to the organization. Focusing on desired results increases the ability to attain the results. Measures allow us to make judgments about the relative effectiveness of various policies and practices, just as baseball scores and statistics allow fans to track the success of baseball teams. In business, the motiva- tion to measure is driven by the need to improve results. A recent study by Deloitte showed that the use of workforce metrics (or analytics) resulted in improved financial, leadership, and recruiting performance.1 However almost two-thirds of companies state that they lack confidence in the processes that they use to measure the effectiveness and impact of their workforce planning initiatives. This is changing, as nearly two-thirds of Canadian companies now have positions such as manager of analytics and forecasting.2

The use of workforce analytics (first introduced in Chapter 8) has a variety of meanings. In its simplest form, workforce analytics is about how HR metrics, such as turnover and employee engagement, are used to describe the workforce. For others, the comparison of these metrics (called benchmarking and discussed later in this chapter) elevates the value of workforce analytics. For many, the value lies in being

Jane Haberbusch, vice-president of HR for Enbridge Gas Distribution, is a keen supporter of the HR scorecard, which she discusses below.

The scorecard works like this: Motivated employees provide great customer service, which results in overall customer satisfaction, which is then correlated with reduced operating costs and increased net profit margins.

Our customer satisfaction ratings are the highest in our sector. We know that motivated and engaged employees provide the best levels of customer service. If you had a workforce that was highly motivated and actively engaged, what types of evidence would you see?

• Low levels of employee turnover, especially of the “critical keepers”

• High levels of employee engagement and employee satisfaction (usually measured through employee feedback instruments)

• Low levels of absenteeism and “presenteeism” (showing up for work but not necessarily being productive)

• High levels of alignment to company goals and objectives

• Effective development of succession candidates to ensure leadership continuity

• Enhanced levels of innovation and creativity in response to business challenges

Using these types of outcomes as measures and assigning stretch targets ensures focus and alignment of all HR-related initiatives. So, for example, before we introduce an HR practice such as a mentoring program for high potentials, we need to establish the connection or the “line of sight” to the company’s overall goals.

Source: Courtesy of Jane Haberbusch.

KEEPING SCORE WITH THE SCORECARD

Workforce analytics How HR metrics, such as turnover and employee engagement, are used to describe the!workforce

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able to use the metrics to predict outcomes (e.g., high turnover in a store will predict lower customer satisfaction and lower sales). This definition captures all of the above: HR analytics is an evidence-based approach for making better decisions about employees and HR policies, using a variety of tools to report HR metrics and to predict outcomes of HR programs.3 This is just one component of a trend toward evidence- based management, which means making decisions based on the best evidence from multiple credible sources. The key here is to move beyond imitating others or relying on managerial perceptions to identifying metrics that are valid and reliable. At this point, you are probably trying to understand the difference between data, metrics, and analytics. These are defined in HR Planning Notebook 14.1.

HR analytics An evidence-based approach for making better decisions about employees and HR policies, using a variety of tools to report HR metrics and to pre- dict outcomes of HR programs

The model of strategic HRM planning outlined in Chapter 1 called for the measure- ment of the success of the plan. The tracking of customer satisfaction or absenteeism rates not only measures progress but also pinpoints weaknesses and identifies gaps. Just as organizations keep scorecards on their financial effectiveness, so too must the HR department track the effectiveness of its programs.

// THE IMPORTANCE OF EVALUATING HRM Over the past 10 years, there has been a noticeable demand from executives for HR to take on the role of strategic partner, and demonstrate its value in measurable terms.4 This is an evolution from the service and administrative roles of the HR function previously. For example, an article in Fortune magazine called for the abolition of the HR function, arguing that HR managers are unable to describe their contribution to value except in trendy, unquantifiable, and “wannabe” terms.5 The author also proposed that efficien- cies could be increased by outsourcing legislated activities (such as payroll and equity) and returning “people” responsibilities to line managers. His exact words were “Blow up the HR department.” Senior executives who read Fortune asked themselves, “Does HR make a difference? Does it add value?” Nearly a decade later, another journalist wrote an article called “Why We Hate HR,” and said that HR practitioners did not have a seat at the table; they didn’t even have a key to the boardroom.6 Clearly, until HR managers can talk about the contribution and value of HR activities in the numbers language of business, the HR department and the HR profession will be vulnerable

HR PLANNING NOTEBOOK 14.1

SOME BASIC DEFINITIONS

Data—facts and statistics collected together for reference or analysis.

Performance metric—measures an organization’s behaviour, activities, and performance.

Analytics—the discovery, interpretation, and com- munication of meaningful patterns in data.

Source: OxfordDictionaries.com, Courtesy of Oxford University Press.

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to destructive proposals such as those listed above. What is the numbers language of business? It means developing a case for any HR program by positing that “if we imple- ment this safety program, we will reduce lost-time injuries and accidents by 50 percent, saving $500 000 annually.”

Increasingly, the HR department is being treated like other operational units—that is, it is subject to questions about its contribution to organizational performance. In the simplest terms, HRM must make a difference; if it doesn’t, it will be abolished. Decision makers within organizations view HR activities, such as training courses, as expenses. They view results as value. The deliverables, not the doables such as training, are what make a difference to the organization. Measurement of the HR function is critical for improving both the credibility and the effectiveness of HR. If you cannot measure contribution, you cannot manage it or improve it. What gets measured gets managed and improved.

Business is a numbers game. Some surveys have shown that HR practitioners, while familiar with some numbers (such as the number of people employed in the organiza- tion), can’t always recite other key numbers (such as the sales volumes, market share, profit levels, and rates of return for their organization). When asked to assess their contribution, most HR professionals describe it in terms such as “number of training courses” or “new hires.” They do not provide numbers for outcomes. They say things such as, “One hundred twenty people attended the training course,” and rarely state, “The training courses resulted in a 15 percent improvement in customer satisfaction.”

RESISTANCE Some HR managers resist measuring their work. Indeed, according to the IBM Global Human Capital Study, only 6 percent of those HR managers interviewed felt that they were very effective at using data to make decisions about the workforce. One reason for this low level is the lack of integration of human resources information systems (HRIS) with each other and with operational systems (finance, sales, and so on).7 Another reason is that HR professionals have limited knowledge of measurement models and limited skills in measurement design. There is an acute shortage of HR professionals with skills in spreadsheets, HRIS, and statistics. Even if consultants can be hired to do the measurement work,8 HR professionals need to know how to understand, interpret, and explain the measures.

HR managers also argue that HR activities cannot be measured, because outcomes such as employee attitudes or managerial productivity are impossible to calibrate mean- ingfully or precisely. They assert that they cannot control the labour market. But the finance department cannot control the inflation rate, and the marketing department has little control over product quality, and yet each of these departments measures its activities and is accountable for results.

Measuring is expensive, but not as expensive as continuing an ineffective program. The main reason HR is not measured is that there is no standard way of measuring. Think of finance and accounting with their widely accepted principles of measurement.9

As the field of HR evolves, the analytic and data-based decision-making capability will develop.10 There may evolve two types of HR, with one branch similar to sales and accounting transactions, and the other more like the marketing and finance strategic decision making.11 For example, the necessary transactional work (similar to accounting) might be handled by a personnel department and the strategic work by the HR depart- ment. The HR function needs to develop a set of analytic measures that can be used to

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describe, predict, and evaluate the quality and impact of HR practices.12 The challenge is to not only develop measures, but also choose the measures that are important to the organization, not just the HR function. Boudreau describes business problems as often a case of “too much information and too few frameworks to interpret the information.”13

Very few organizations measure the impact of HRM; about two-thirds of HR pro- fessionals in Fortune 500 companies measure HR productivity.14 However, those that do measure are more likely to be treated as strategic partners.15 Interest in measuring HR is growing slowly, fuelled by

• Business improvement efforts across organizations • Attempts to position HR as a strategic partner • The need for objective indicators of success to accompany the analysis of HR

activities

There are other pressures that make measurement a hot topic in HR. For example, Sarbanes-Oxley (American legislation that affects Canadian companies operating in the United States) requirements force HR to provide information about executive com- pensation, pension plans, and whistle blower protection. More HR professionals are now trained in the field of measurement and capable of developing HR scorecards and measuring human capital. There is an increased awareness among leaders that invest- ments in HR can impact customers and then the bottom line.16

RATIONALE There are nine compelling reasons for measuring HRM effectiveness:

1. Labour costs are most often a firm’s largest controllable cost. 2. Managers recognize that employees make the difference between the

success and failure of projects and organizations. Good performance can be rewarded objectively.

3. Organizations have legal responsibilities to ensure that they are in compli- ance with laws governing the employer–employee relationship.

4. Evaluations are needed to determine which HR practices are effective, because at this point managers and HR professionals cannot distinguish between a fad and a valid change program.17 HR is often criticized for com- municating with executives with PowerPoint (rhetoric), not Excel (results).18 Professor Terry Wagar of St. Mary’s University in Halifax has studied fads and determined that many of the practices are not integrated with other HR systems, and that they are fragile and do not survive.19 HR profes- sionals should be skeptical of potential fads, as research has shown that 90 percent of them lose their popularity within a decade rather than become accepted practice.20 The characteristics of fads are outlined in HR Planning Notebook 14.2.

5. Measuring and benchmarking HR activities will result in continuous improvements. Performance gaps can be identified and eliminated.

6. Audits will bring HR closer to the line functions of the organization. The practices must demonstrate that they enhance competitive advantage, not just that they are efficient or “best-in-class.”21

7. Data will be available to support resource allocations.22

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HR PLANNING NOTEBOOK 14.2

WHAT IS A FAD?

Over 100 magazines are devoted to business issues, 30!000 business books are in print, and 3500 new ones are published every year. These books often contain contradic- tory advice: “the first-mover advantage” or “the second mouse gets the cheese.” Fads, such as “emotional intel- ligence,” become popular very quickly, and then undergo a steep decline.

A fad has a typical life cycle:

Stage 1: Ascendency:

• Language such as “Something new and revolutionary is here” and “Out with the old, in with the new”

• Descriptions and how-tos • Great praise and high promise

Stage 2: Maturity:

• Exhortations to jump on the bandwagon • Initial questions asking whether the technique is

a fad • Suggestions and pleas to look beyond the

superficial

Stage 3: Decline:

• Problems, pitfalls, and failures • Questions asking if there is anything worth saving

A fad can also be defined by these characteristics:

It is simple and claims to solve complex problems.

It claims to apply to and help anyone. It is not anchored or related to any known and generally accepted theory.

Proponents hesitate to present it in academic set- tings or write about it in referred journals.

Proponents cannot tell you exactly how it works.

It is a “track” topic at 75 percent of the confer- ences that you have attended.

Its proponents claim that it has changed their lives and that it can change yours too.

Its greatest proponents are those with the least experience in the field.

It is just too good to be true.

Organizations often adopt a practice simply because others are doing it. This will occur if a large number of organizations are doing it (frequency-based mimicry), if! large visible firms are doing it (trait-based mimicry), or if other firms seem to be successful by adopting it (outcome-based mimicry).

What is the solution for HR professionals when con- fronted with a consultant proposing “another fine idea”? Ask for evidence that it works. If you are tempted, imple- ment the concept in one small unit, and measure the out- comes. For example, one might ask: What is the evidence that this concept will work in our organization, and what is the risk of implementing this practice?

Sources: A. Garman, “Shooting for the Moon: How Academicians Could Make Management Research Even Less Relevant,” Journal of Business and Psychology, Vol. 26, No. 2 (2011): 129–133; B.S. Klass, “Outsourcing and the HR Function: An Examination of Trends and Developments Within North American Firms,” The International Journal of Human Resource Management, Vol. 19, No. 8 (August 2008): 1500–1514; J. Pfeffer and R.I.!Sutton, “Evidence-Based Management,” Harvard Business Review, January 2006: 63–74; D. Miller, J. Hartwick, and I. Le Breton-Miller, “How to Detect a Management Fad and Distinguish It from a Classic,” Business Horizons, Vol. 47 (July/August 2004): 7–16; and D. Ulrich, Human Resource Champions (Boston, MA: Harvard Business School Press, 1997), p. 63.

8. Investors want this information. Why? The market-to-book ratio suggests that for every $6 of market value, only $1 appears on the balance sheet. This money would represent tangible assets such as buildings and equipment, and financial assets such as cash and marketable securities. The remaining $5 represents intangible assets. For example, the market capitalization of

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Microsoft (i.e., the price per share times the number of shares outstanding) is $593 billion, while the total value of its tangible assets is only $196 billion. The $397 billion difference lies in its intangible assets such as brand equity and employee commitment. Likewise, Google has a market cap that was 2500 percent greater than the company’s equipment, property, and plant.23 So when a metric such as employee commitment rises, investors can use this number to predict increases in customer satisfaction, retention, and sales.24

9. HR managers are more likely to be welcome at the boardroom table, and to influence strategy, if they use measures to demonstrate the contribution of their function.25

The next section describes the areas in which HRM departments can be evaluated.

// THE 5C MODEL OF HRM IMPACT Executives, investors, customers, and HR professionals themselves make judgments in many ways about the effectiveness of the HR function. The numerous areas that are judged can be grouped into five clusters—the “5 C’s” of evaluating HRM: compliance, client satisfaction, culture management, cost control, and contribution.26

COMPLIANCE Senior management depends on HR expertise to ensure that organizational practices comply with the law, and many HR departments were started because of the need to record compliance with employment standards, such as hours worked and overtime payments. Legislation dealing with the employer–employee relationship is increasing, and the areas of safety, health, employment equity, and industrial relations are all highly regulated. Indeed, some people estimate that 20 to 30 percent of the increase in the salaries of HR professionals is due to the need to trust someone with the responsibility for compliance.

Highly publicized cases of safety violations in which board members of industrial organizations have been fined hundreds of thousands of dollars or threatened with jail time serve as another wakeup call. Other public cases that have cost organizations not only the expense of fines but also loss in business have occurred because managers have been held responsible for the sexual harassment of their subordinates. Recent cases with the RCMP and American television networks have resulted in litigation and settlement costs in the millions. HR can make a difference by ensuring that managers and employees comply with the law, thus saving the company legal costs, fines, and damaging publicity.

Currently, HR is being asked to ensure not only that the organization complies with laws but also that it is ethical. This means the development of a code of conduct, protection for whistleblowers, and the redesign of orientation and training programs to include curriculum on ethics.

CLIENT SATISFACTION Across Canada, many organizations are tracking their success by measuring customer satisfaction or soliciting input on client complaints and attitudes. These measures have been found to predict financial performance, on a lagged basis. This means that if

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employee morale drops, management can expect to see customer satisfaction levels drop in about six months.

Stakeholders, who include external and internal clients, are those people who can influence or must interact with the HR department. External clients of HR comprise candidates for positions, suppliers of HR services such as technology, and government regulators. Internal clients include employees grouped by occupation, union leaders, and managers. These stakeholder groups were discussed in Chapter 3.

Managers are turning to client or stakeholder perceptions of the HR department for input about the effectiveness of HR performance. This approach stems from ear- lier efforts in total quality management and tries to reconcile the gaps between client expectations and levels of satisfaction. The bigger the gap, the less effective the HR department. This qualitative approach surveys stakeholders about their perceptions of the effectiveness of the HR function. However, recent surveys have indicated that only one-half of managers and employees rate HR’s overall performance as good.27 “Keeping the clients happy” has important political repercussions for the HRM department, as “clients” such as the CEO control the purse strings and have the authority to approve HR policies and programs.

ADVANTAGES OF MEASURING CLIENT SATISFACTION

The advantages of measuring client satisfaction with the HR department include the following:28

• Measuring client satisfaction reminds the HR department that it is indeed a “service” that must deal with the expectations of its clients. The clients, in turn, use assessment criteria that are important to them, such as response time and assistance required to meet their goals.

HR professionals need to survey managers about their satisfaction levels.

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NEL 375CHAPTER 14 HR Assessment and Analytics

• Surveying clients about their unmet needs increases the credibility of the HR function.

• Initiating and managing change by surveying stakeholders before, during, and after a change program increases the possibility that the HR depart- ment will understand the clients’ perceptions; identify resistance to change and overcome such resistance; and prove that the change program meets its goals.

METHODS OF MEASURING CLIENT SATISFACTION

Information can be gathered from clients in several ways.

INFORMAL FEEDBACK Stakeholder perceptions can be obtained informally, as part of the feedback process, whenever the HR professional is undertaking an assignment or completing a routine task such as filling a position. People can simply be asked if they are satisfied with the service.

Informal feedback is of limited use, however, for several reasons. Line managers might be reluctant to give honest feedback face to face; an individual HR officer might not be able to see patterns in the feedback because there is no method for measuring the frequency of problems; and HR professionals have little incentive to report nega- tive feedback to superiors in the organizational hierarchy. For these reasons, a more systematic method must be developed to identify gaps in the performance of the HR department.

SURVEYS Surveys can be used to solicit feedback confidentially, anonymously, and from a larger number of stakeholders. One approach is to list the HR activities, such as selection, and ask specific questions about them, such as questions about satisfaction with the time it takes to fill a vacant position and the satisfaction with a new employee’s performance. Some questions that might be included in such a survey are as follows

• To what degree do you find the HR department cooperative? • How would you rate the quality of service given? • To what degree are HR employees available to deal with problems? • Do you have confidence in HR advice? • How would you rate the effectiveness of HR solutions? • What is your opinion on processing time? • To what extent does HR understand the needs of your department? • Overall, how satisfied are you with the HR department?

Another survey, developed by Ulrich, asks managers to rate the quality of the various roles that HR plays in strategy formulation.29 HR Planning Notebook 14.3 contains a sample of the questions used in this survey.

Managers might be asked to list the chief strengths and principal weaknesses of the HR department. Line managers might be asked questions about what the HR department has been doing particularly well or particularly poorly, what it should not be doing, how it might contribute more effectively, and so on.30

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CRITICAL INCIDENT METHOD In the critical incident method, clients are asked to describe a situation in which the HR department provided assistance that was particularly useful, the consequences of this help, and why it was seen as helpful. Similarly, they are asked to describe a situation in which the assistance was not at all useful, and why. Clients’ responses help the HR department identify issues and services that affect unit effectiveness.

PROBLEMS WITH MEASURING CLIENT SATISFACTION

Measuring client satisfaction is not without its weaknesses.

HIGH EXPECTATIONS OF CLIENTS The goal of surveying clients is to identify gaps between their expectations and their satisfaction. If the clients in one business unit have extremely high expectations, their dissatisfaction scores will also be high, even though the level of HR service is constant across units. The temptation on the part of the HR department might be to promise or commit to less with regard to programs so as to appear to have performed better.

CONFLICTING EXPECTATIONS Another problem occurs when different stakeholders have competing or conflicting expectations. The employee group might desire extensive counselling (a nurturing role) from the HR department, while senior managers might be concerned about maximizing productivity per employee (an efficiency goal). One group will be dissatisfied because it is difficult for the HR department to be both nurturing and efficient.

PROFESSIONAL AFFILIATIONS Furthermore, gaps between expectations and performance might occur because HR professionals are more closely tied to the norms and values of their profession than to the norms of managers or line operators.31 For example, line

HR PLANNING NOTEBOOK 14.3

HR ROLE ASSESSMENT SURVEY

The following is a sample of the type of survey clients can expect: Please rate your satisfaction with the HR department on the following items* (1 = low; = 5 high):

• HR helps the organization accomplish business goals.

• HR participates in the process of defining busi- ness strategies.

• HR makes sure that HR strategies are aligned with business strategies.

• HR is effective because it can measure how it helps make strategy happen.

• HR is a business partner.

* The selected items measure the strategic role of HR.

Source: Reprinted by permission of Harvard Business Press. From Human Resource Champions, by D. Ulrich, 1996, p. 49. Copyright © 2012 by Harvard Business School Publishing Corporation; all rights reserved.

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managers might value how fast a job is filled, while the HR professional might value the creation of a valid selection test. In other words, the HR professional might be trying to do what is right in the profession (“validate the selection test”), rather than what managers consider important (“just hire someone quickly”).

Whatever the problems with the client satisfaction approach, the important mes- sage is that the viability of the HR function depends to a large extent on stakeholder perceptions of value and effectiveness. These must be measured and managed.

CULTURE MANAGEMENT Highly effective organizations seek to influence employee attitudes through the devel- opment of an appropriate culture that will support optimum performance. (Remember that culture can be defined as the set of important beliefs that members of a community share—“the way we do things around here.”) Executives carefully monitor cultural programs (such as that of empowerment) through attitude surveys of employees. The results of these surveys can then be linked to the objective results of the department.

The assumption underlying the culture management model is that HR practices can have a positive influence on employee attitudes, which in turn influence employee performance.

Attitudes, in an organizational context, can be defined as perceptions or opinions about organizational characteristics. Some examples include the attitudes expressed in these statements: “I think that management expects too much for the resources it gives me” or “I feel that I can talk to management about any problems I am experiencing.”

The most frequently measured attitudes in the organization are job satisfaction and commitment. Surveys of satisfaction and commitment measure attitudes toward supervisors, colleagues, pay, promotions, and the work itself. The research supports the proposition that attitudes affect behaviours. Highly committed employees will make personal sacrifices for the job, perform beyond normal expectations, work selflessly, endure difficult times, and not leave the organization for personal gain.32

About 80 percent of Canadian organizations measure employee engagement, and the majority of organizations report scores between 60 percent and 80 percent.33

Figure 14.1 shows how information from these surveys is used to guide policy and practice.

A Towers Perrin study of 40 global companies over three years showed that com- panies with employees with high engagement scores had more than 3 percent in net profit margin over those with low scores.34 A landmark study of 800 Sears stores demonstrated that for every 5 percent improvement in employee attitudes, customer satisfaction increased by 1.3 percent and corporate revenue rose by 0.5 percent.35 Employees with the highest levels of commitment perform 20 percent better and are 87 percent less likely to leave the organization. Employees at Molson Coors, the bev- erage company, who reported high levels of engagement were five times less likely to have a safety incident and seven times less likely to have a lost-time safety incident.36 Canadian organizations are realizing the benefits of high employee engagement: TELUS receives about 75 percent fewer complaints than its competitors and attributes this to its world-leading employee engagement scores. WestJet has one of the most admired corporate cultures (with high employee engagement) and is one of the most profitable airlines in North America.37

HR Planning Notebook 14.4 examines the different terms that organizations may use when measuring employee attitudes.

Attitudes Perceptions or opinions about organizational characteristics

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HR PLANNING NOTEBOOK 14.4

MEASURING EMPLOYEE ATTITUDES

Organizations use different terms in measuring employee attitudes:

• Satisfaction: This is a passive measure of employee contentment with little relationship to performance.

• Motivation: This measure probes whether employees feel stimulated in their role and are driven to meet work and organizational goals. Motivation is strongly related to productivity measures.

• Commitment: A measure of the alignment between the strategy, objectives, and values of the organization, commitment is strongly linked to employee loyalty and customer service excellence.

• Advocacy: This is a measure of whether employees will speak highly of the organization as an employer, and as an organization with products

and service. Advocacy is strongly linked to sales growth and employee attraction.

• Engagement: If an employee scores highly on motivation, commitment, and advocacy, then she would be classified as engaged. Engaged employees are more productive, deliver higher customer satisfaction levels, deliver the brand promise more effectively, create stronger growth, and generate higher profits.

Hewitt Associates describes the attitudes of an engaged employee in three simple ways:

• Say: Consistently speaks about the organization to co-workers, potential employees, and customers

• Stay: Has an intense desire to be a member of the organization

• Strive: Exerts extra effort and engages in behav- iours that contribute to organizational success.

Source: Courtesy of The Conference Board of Canada, 2017, Talent Management Report, Fourth Edition p. 95.

(percentage of organizations; n = 115)

Identify priority areas for increasing engagement within the organization

Measure and communicate levels of engagement throughout organization

Input into leadership development

Prioritize talent management investments/programs

Measure performance of senior leaders

Measure performance of managers

Measure performance of HR

0 20 40 60 80 100 120

FIGURE 14.1

HOW ENGAGEMENT DATA ARE USED

Sources: Adapted from A. Brown and S. Kelly, “Connecting Staff Research with Company Success,” Strategic HR Review, Vol. 9, No. 1 (2006): 24–26; and Hewitt Associates 2007 Best Employers in Canada Study.

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NEL 379CHAPTER 14 HR Assessment and Analytics

Organizations should pay attention to employee attitudes and should attempt to manage the culture to improve individual and organizational performance. HR man- agers might want to ask the managers in their organizations about the effectiveness of the engagement surveys being used by asking questions such as the following:

1. Does the survey prompt discussions with your direct reports? 2. Does the survey help you identify actions that can be taken to improve the

engagement scores?38

COST CONTROL Traditional organizations continue to see personnel as an expense. The labour compo- nent of the production process in service organizations, such as universities and govern- ment departments, is an organization’s single largest expense. This cost represents up to 85 percent of the expenses in white-collar organizations. The cost of employees consists of pay and benefits, the cost of absenteeism, and the cost of turnover. HR practices can reduce labour costs by reducing the workforce while attempting to get the same volume of work done with fewer employees. There are three ways to reduce labour expenses by reducing the size of the labour force:

• Technology: One of the most frequently used ways to cut labour costs is to increase the use of technology. Technology to process benefits claims and pursue e-learning has replaced HR staff, resulting in cost savings of about 30 percent.39

• Outsourcing: Firms are also outsourcing major activities in order to manage the costs of labour. However, there are detrimental effects of cutting costs in this way. Core talent may be lost and the capacity for innovation diminished.40 See Chapter 13 for a more detailed discussion of outsourcing.

• Downsizing: Chapter 10 provides an analysis of the processes for restructuring.

Often, companies try to reduce the headcount in the HR department as part of a strategy to save costs. But the savings can be deceptive. For example, a financial services company cut its HR headcount by 30 percent (around 300 people). But then the line managers hired their own staff to handle the HR issues, and the shadow organization of HR specialists now numbers 150.41

HR departments can reduce expenses associated with employees in at least two other ways. The first is to increase the efficiencies of those working (i.e., achieve the same results at lower costs or faster speeds), and the second is to reduce the costs associ- ated with behaviours such as absences or turnover that are, to some extent, under the control of the employee.

INCREASING EFFICIENCY

Efficiency is expressed in terms of the results achieved (outputs) in comparison to the resource inputs. Measures of efficiency include the following:

• Time (e.g., average time to fill an opening, process a benefits claim) • Volume (e.g., number of people interviewed to fill a job, number of requests

processed per employee) • Cost (e.g., cost per training hour or per test).

Efficiency Results achieved compared to resource inputs

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HR managers should measure these resource inputs and then attempt to improve the measurements over time or across units. The use of benchmarks is critical in com- paring one organization’s efficiency ratios against the best in the field. Data revealing a cost per hire of $500 or turnover rates of 15 percent are meaningless without relevant comparison points. For example, a turnover rate of 15 percent among senior executives indicates a problem; a turnover rate of 15 percent in a fast-food restaurant is very low.

The ratios generated must be interpreted and analyzed by comparisons made over time, across departments, and against the benchmarks of best practices. These bench- marks allow the HR manager to make the following kinds of statements: “The cost per hire is $500, which is $50 less than last year and $60 less than another company. That shows we are doing a better job than we did last year and than other HR departments.” HR Planning Notebook 14.5 provides examples of these measures.

These efficiency measures must be managed with effectiveness in mind. Conceptu- ally, it is possible to reduce training costs to zero, but the performance of employees would suffer in the long run. Therefore, most companies add a qualifier to the ratio when judging efficiency. For example, lowering the cost per trainee would be acceptable only if job performance remained the same or improved.

HR PLANNING NOTEBOOK 14.5

EXAMPLES OF EFFICIENCY MEASURES

Cost

• Ratio of compensation expense to total operating expense

• Benefit cost per employee covered • Ratio of benefits expense to total operating expense • Processing costs per benefit claim • Administration costs per benefit claim • Cost per training day • Cost per trainee per program

Volume

• Number of training days

• Number of interviews per selection • Ratio of filled positions to authorized positions • Percentage of employees with formal performance

evaluations • Percentage of designated employees

Response Time

• Time between requisition and filling of position • Time to process benefits • Time from identifying a training need to program

implementation • Time to respond to requests by category

COST OF EMPLOYEE BEHAVIOUR

The costs of absenteeism, turnover, and occupational injuries and illnesses can all be measured, benchmarked, and managed. Any introductory textbook in HRM will describe how to measure these factors and will provide prescriptions for reducing the costs related to them. To control the expenses associated with employees, organizations should care- fully track and compare the rates of absenteeism, turnover, and occupational injuries

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and illnesses. Here are some figures to think about: On average, each full-time employee missed 6.9 days over the year (with health and government sectors reporting higher rates at 10.9 and 8.9, respectively).42 Across all sectors, average turnover is about 15 percent annu- ally, and highest in services, retail and health care (around 22 percent to 27 percent).43

The costs of turnover, which include termination, replacement, loss of revenue when the position is vacant, and the learning time for new employees to become productive, are estimated at between 6 and 18 months of the employee’s annual compensation. At Taco Bell, the stores with the lowest turnover yielded double the sales and 55 percent higher profits than stores with the highest turnover rates.44

In keeping with the trend to view employees as investments, and not just as expenses, the next section examines how organizations measure the return on this investment.

CONTRIBUTION Unless HR can demonstrate its impact on the bottom line, it will continue to be seen as “overhead,” as a department that grabs resources while contributing nothing. Many executives feel that it is time for the HR department to identify and evaluate its contri- bution, as other departments are expected to do.

The thesis underlying the contribution model is that HRM practices shape the behaviour of employees within an organization, and thus help the organization achieve its goals. In other words, the effective management of people makes a difference in how well an organization functions. Research has shown that HR practices can affect organi- zational performance in measurable ways. Studies have established that sophisticated and integrated HRM practices have a positive effect on employee performance: They increase knowledge, skills, and abilities; improve motivation; reduce shirking; and increase reten- tion of competent employees. These best practices have a direct and economically significant effect on a firm’s financial performance.

// HOW HR CONTRIBUTES TO ORGANIZATIONAL PERFORMANCE The majority of published studies find an association between HR practices and firm performance.45 HR matters. The basic causal model shows that HR practices impact collective commitment, operational performance, expenses, and profits.46

We will look now at two ways of measuring contribution: financial measures and measures of managerial perceptions of effectiveness.

FINANCIAL MEASURES

SURVIVAL

Private or for-profit organizations can measure a dramatic indicator of success: survival. This can be considered a zero-sum index. If the company survives—that is, does not go bankrupt or cease business—the organization is a success. Survival is the first measure of effectiveness, and the contributions of HRM practices should be judged against this life-or-death index.

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When researchers tracked the survival rates over five years of new organizations listed on the stock exchange, they found that HR practices were associated with this ultimate measure of a firm’s performance.47

This crude measure is not satisfying for most businesspeople, however, because it doesn’t give relative measures of success. (Teachers who give a pass or fail, rather than an A, B, C, D, or F grade, leave the same sense of dissatisfaction among students.) Most employees desire a relative measure, and will even ask “How am I doing compared to the others?” at performance evaluation interviews. The most common measures of business success provide these points of comparison, which allow judgments to be made across divisions, companies, and even sectors. They are the bottom-line measures such as profits.

PROFITS OR RETURN ON INVESTMENTS

All businesses track sales, or revenues, return on investment (ROI), return on equity (ROE), expenses relative to sales, and other financial ratios. These indices measure the relative success of an organization in meeting its goals. Any HRM practice that contributes to these measurements likely would be endorsed by senior management. Measuring the impact of HRM investments in training or performance appraisal allows HR professionals to use the same language (e.g., basic costs, ROI) as other corporate units and provides a rational way of making decisions. HR Planning Today 14.1 illustrates how this might work.

HR PLANNING TODAY 14.1

RETURN ON INVESTMENT EXAMPLE: NATIONAL STEEL’S SAFETY INCENTIVE PROGRAM

National Steel was concerned about its safety record and was experiencing unacceptable accident frequency rates, accident severity rates, and total accident costs. A perfor- mance analysis indicated that the employees knew and understood safety guidelines and practices, so training was not the issue. The central safety committee felt that incentives were needed to motivate safe behaviour. The incentive plan was to offer each employee $75 cash (after taxes) for every six months without a medical treatment case. The committee established goals of reducing acci- dent frequency from 60 to 20, and the disabling frequency rate from 18 to 0. The committee tracked the number of medical treatment cases, lost-time accidents, lost-time days, accident costs, hours worked, and incentive costs.

The costs over four years were as shown in the table below.

ROI CALCULATION

The cost of the annual incentive payout (two-year average) plus annual administrative plan cost was $72 172. The

benefits were calculated as an annual improvement of $431 372 (accident costs for years 1 and 2 totalled $1!046 488, for an average of $523 244 annually; accident costs for years 3 and 4 averaged $90 872, for an annual improvement of $432 372).

An interesting twist in this case is that managers were asked what contributed to these improvements, and they estimated that 80 percent was due to the incen- tive program and 20 percent to their renewed manage- rial attention. So the calculations of benefits were revised to indicate that 80 percent of the annual improvement ($345!898) was due to the incentive program.

ROI of the safety incentive program 5 Net benefits 2 Costs 5 ($345 898 2 $72 172) 4 $72 172 5 3.79 ! 100 = 379%

ROI Return on investment ROE Return on equity

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There are some limitations to financial analyses, however; they capture certain immediate aspects of performance, but they do not capture managerial perceptions of effectiveness.

MEASURES OF MANAGERIAL PERCEPTIONS OF EFFECTIVENESS Sometimes financial measures are not available to researchers who are studying pri- vately owned organizations, and sometimes financial measures are not appropriate for public-sector organizations. It is meaningless to talk about government departments in relation to profits, for example. Therefore, other measures have been sought. One method is to ask managers to assess their organization’s performance relative to the performance of sector competitors.48 Despite the biases that might be introduced into such a measure, these perceptions have been found to correlate positively with objective measures of a firm’s performance.49 The principal advantage of using a per- ceptual measure such as this one is the ability to compare profit-seeking firms with public organizations.

Templer and Cattaneo argue that organizational effectiveness is not easily defined.50 Measures beyond survival and those discussed above might include the achievement of one group’s political objectives at the expense of a competing interest group and the adaptation of an organization to its environment (which obviously contains an element of the survival measure).

The measure that supersedes all these might be one of goal optimization. Templer and Cattaneo combined these various perspectives to conclude that “an effective orga- nization is one in which the behaviour of employees contributes towards the attainment of organizational goals and enables the long-term adaptation of the organization to its environment”—that is, survival and effectiveness.51

Which is the best measure of HRM performance? Managers will choose whichever of the 5C measures meets their needs for information. Some will require measurement of all the five C’s; others will focus on one important indicator, such as cost control. Some companies are moving toward a balanced approach.

We have examined five areas in which HR practices and policies should be tracked. Now we turn to an examination of the various approaches to measuring the effectiveness of HR policies, practices, and programs.

Year 1 Before Plan

Year 2 Before Plan

Year 3 After!Plan

Year 4 After!Plan

Needs assessment costs $1200 $1200 N/A N/A Plan administration/evaluation $1600 $1600 N/A N/A Safety incentive payouts $58 013 $80 730 N/A N/A Cost of accidents $468 360 $578 128 $18 058 $19 343 Total costs accidents + prevention $468 360 $578 128 $78 871 $102 873

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// APPROACHES TO MEASURING HRM PRACTICES This section outlines a number of quantitative and qualitative approaches to measuring the impact of HRM policies and practices. Typical ways of measuring HR activities are as follows:

• Activity-based measures: The number of employees completing training; the number of employees hired

• Costing measures: The cost of the training program; the cost per hire • Client satisfaction: The manager has a problem solved; the HR department

changed an employee’s benefits information quickly

Most of these methods use numbers, which can measure the impact of HRM in the language of business: costs, days lost, complaints, and so on. But the question has to be asked: Where is the added value? See HR Planning Notebook 14.6 for a description of added value.

The next three approaches—cost–benefit analysis, utility analysis, and benchmarking— attempt to prove value.

HR PLANNING NOTEBOOK 14.6

ADDED VALUE

What do we mean by added value? The following examples help explain this concept:

• An activity measure for an HR professional would be the number of people trained.

• A performance measure for an HR professional would be the number of trainees who passed the

training test or rated the training courses as above average.

• An added-value measure for an HR professional would be the increase in profits, sales, or customer satisfac- tion, or decrease in complaints, errors, or defects, as a result of the skills learned in the training course.

Cost–benefit analysis The relationship between the costs of a program and its benefits Direct costs The hard costs that can be measured by expenditures

COST–BENEFIT ANALYSIS HRM activities, such as the process of selecting employees, cost money. Most organizations absorb the costs of these activi- ties without conducting analyses to determine benefits. Cost– benefit analysis examines the relationship between the costs of a program and its benefits.

Costs included in these calculations are classified in several ways. Direct costs are those that are used to imple- ment the program, such as the HR should always measure the direct and indirect costs of training.

ur es

to ck

/G et

ty Im

ag es

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NEL 385CHAPTER 14 HR Assessment and Analytics

cost of selection tests or training materials. Indirect costs are those that an organization absorbs, such as the trainee’s time away from work. Indirect costs often go unrecognized, and sometimes are not included in cost–benefit analyses. HR Planning Notebook 14.7 presents an example of a cost–benefit analysis.

Most programs can be subjected to a cost–benefit analysis if hard data are avail- able, or the value of a program can be estimated from soft measures such as supervisors’ estimates of productivity.

UTILITY ANALYSIS Senior managers are often faced with decisions about the most effective programs. For example, to motivate employees, should HR managers implement a leadership training program or a pay-for-performance program for new supervisors? To hire the best candidate, should HR managers use peer interviews or the new selection test? HR managers would have much to gain if they were able to estimate if program A provided a greater return than program B. The training director, for example, might argue that grouping 100 managers in a classroom for training is more expensive and less effective than e-learning.

A tool that calculates, in dollar terms, the costs and probable outcomes of deci- sions would assist HR managers in making choices among programs. Utility analysis is such a tool. It is a method of determining the gain or loss to the organization that

HR PLANNING NOTEBOOK 14.7

MEASURING THE CONTRIBUTION OF HRM PRACTICES

A wholesale produce company hired, and then fired, seven ineffective sales representatives over a two-year period. The company calculated the costs of these actions.

Costs

readiness or weed out those who didn’t meet the standards

• Performance counselling training for managers so that they could learn to discuss performance prob- lems and ensure that trainees accepted responsi- bility for their own learning and performance.

The cost to implement these three programs was $15!400 (development and attendance costs).

The savings that resulted from this solution were then calculated.

Savings Cost of the problem $2 161 668 Cost of the solution – $15 400 Total savings $2 146 268

Training $493 738 Recruiting $30 100 Management time to train and terminate $25 830 Lower profits and higher waste due to poor performance

$1 612 000

Total costs $2 161 668 The HR department interviewed line managers to develop a profile of the ideal sales representative and identified 12 critical success factors. Then the company’s HR depart- ment developed a solution involving three types of training:

• Behaviour-based interview training for managers • A training program for newly hired sales

representatives to accelerate performance

The cost-benefit ratio is as follows:

$2 146 268 4 $15 400 5 139:1

Source: Adapted from material originally published as “Increase HR’s Contributions to Profits,” by D.M. Burrows, HR Magazine, September 1996, pp.!103–110. © 1996, Society for Human Resource Management, Alexandria, VA. Used with permission. All rights reserved.

Utility analysis A method of deter- mining the gain or loss that results from different approaches

Indirect costs The soft costs whose value can be estimated but not measured easily by financial expenditures

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results from different courses of action. Faced with a decision, managers use utility analysis to help them choose the strategy that produces the outcomes the organiza- tion is seeking.52 This method measures the utilities (gains and losses) by using human resources accounting. Human resources accounting uses standard accounting practices to calculate and report an organization’s human assets (or employees) in economic terms. The costs of recruiting, selecting, training, and retaining employees are calculated, and then these costs are amortized over the employees’ working lives. The method seeks to quantify, in dollars, the value of improvements in HR activities, particularly selection. In utility analysis, which is an extension of cost–benefit analysis, the costs and benefits of alternative solutions to a problem are calculated and compared. The decision maker then can use the quantitative data that result from utility analysis to choose the alterna- tive with the highest net value. HR Planning Notebook 14.8 provides an example of how utility analysis can be used to reach a decision.

Utility analyses have been used in various studies. However, the computations involved are beyond the competencies of most managers.53

HR PLANNING NOTEBOOK 14.8

AN EXAMPLE OF UTILITY ANALYSIS

Utility analysis is statistically complex, but it can be illus- trated by the following simple example.

An organization has a choice between two types of selection procedures (or can use neither). The utility of a selection procedure is the degree to which it results in a better quality of candidate than would have been selected if the selection procedure had not been implemented. Quality can be measured by tenure (Did the employee selected using the selection procedure remain with the organization at least one year?) or performance (Did the new employee rate above average in performance after

one year?) or other objective outcomes (Did the employee sell more accounts or process more files?). The costs of using procedure one (an ability test), procedure two (peer interviews), or the usual selection method (or base rate) of managerial interviews are calculated. Then the benefits of the candidates chosen under each of the three methods are determined. If tests resulted in higher-performing can- didates but cost more than the performance increase is worth, the tests have little utility. If peer reviews result in greater performance at no greater cost, peer reviews have great utility.

Source: M. L. Blum and J.C. Naylor, Industrial Psychology: Its Theoretical and Social Foundations, rev. ed., New York: Harper-Row, 1968.

BENCHMARKING A plan needs an audit. An audit measures progress against goals. If the goal of the HR function is to train 100 managers, at some point data need to be gathered to determine if that goal was achieved. Audits keep the HR department on track and are the primary tool to assess current performance to develop action plans and future goals.54 Audits can be done annually or quarterly, but a consistent checking against the plan ensures no year-end surprises and allows managers to take corrective action. For example, if the goal is to achieve 4 out of 5 on an employee satisfaction scale, and an audit shows pockets of low satisfaction, the HR department can target those areas for remedial action before year-end. Nevertheless, the audit is not the last step in the cycle of plan, execute, and measure.

Audit A measurement method that assesses progress against plan

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Benchmarking is concerned with enhancing organizational performance by estab- lishing standards against which processes, products, and performance can be compared and subsequently improved.55 It is searching for the industry’s best practices and then trying to achieve improved performance by adopting superior practices.56 Benchmarking can be used to accomplish the following:

• Stimulate an objective review of processes, practices, and systems • Motivate employees to perform to a higher standard by providing a common

target for improvement • Provide objective comparative data with best-in-class organizations • Raise questions and stimulate discussions about better ways of operating57

The process starts by targeting an area for improvement, such as university recruit- ment in the staffing function. Key measures are identified for comparison. In recruit- ment these might be cost per hire, quality of hire, processing times, and percentage of acceptances from first-choice candidates. The next step is to identify the best-practice organizations through publications, associations, experts, and awards ceremonies. There are four sources of benchmarking partners:

• Internal (e.g., compare university recruitment with high-tech recruitment, or compare previous year recruitment with this year’s recruitment).

• Competitive (compare exact functions of a competitor). • Sector (some conditions may differ for your organization)—some sector asso-

ciations establish HR benchmarking subcommittees, which share information. There is a Human Resources Benchworking Network, which gathers data for health care, municipal governments, and not-for-profits. The BC HR associa- tion has a benchmarking service.

• Best-in-breed organizations (whose products, culture, and so on may not be comparable)—many of these organizations are willing to share this information if there is an incentive for them, such as a copy of the report, access to your metrics, and so on. Disney World and South West Airlines are examples of best-in-breed organizations whose HR practices are often analyzed and benchmarked.

Benchmarking can be done by either internal or external consultants. Internal consultants have the advantage of knowing more about the organization and being trusted by the staff supplying the information. However, external consultants might be more objective, have greater numbers of outside references or benchmarks, and be more likely to convey bad news to management. Sometimes an independent body, such as The Conference Board of Canada, will act as the project manager for the benchmarking study so that confidentiality is not an issue in data collection. This third-party interven- tion helps with the obvious question: Why would competitors want to reveal their best practices? And if they do so, is it because they have developed even more powerful processes that they do not share?58 Obviously, the results obtained from audits can be compared with benchmarks obtained from previous years, with other organizational units, or with other companies.

After the data have been collected and compared, the differences will be obvious. The best organization might have metrics such as a 6-week processing time, while your organization might process applicants in 12 weeks. Interviews during or after the data collection might reveal the reasons for the speed—perhaps the entire processing is done online. The goal then becomes to match the best target for each of the indices.

Benchmarking A process that can enhance organiza- tional performance by establishing stan- dards against which processes, products, and performance can be compared and improved

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For instance, the training function can be examined as a percentage of payroll spent on training, training dollars spent per employee, profits per employee, training costs per hour, and so on. The results of these examinations can be compared to comparable figures for other organizations. As an example, in Canada, organizations spend about $705 per employee on training.59 These benchmark statistics can be used as guidelines. If statistics are available on the best-performing companies, organizations can attempt to match those figures.

Benchmarking is popular because the measures are easy to collect and the num- bers have a superficial credibility, but there is no published research that supports a relationship between HR benchmarks and ultimate firm performance.60 We all like to know benchmarks such as the facts that Apple has the highest profit per employee at half a million dollars and LinkedIn at $55 000 per employee.61 But these numbers are relatively meaningless. For example, an organization can have one HR professional per 1000 employees because it has outsourced most of the HR work. Knowing that your organization’s cost per employee is higher than the sector benchmark does not provide you with anything of value, anything that would lead you to a cause and a solution. Finally, you cannot build competitive advantage by copying it, because the best capabilities (like the culture at Southwest Airlines) are complex and difficult to imitate. An organization has to create its own capabilities.62

THE HR SCORECARD Although the most popular way of measuring HR is benchmarking, the HR balanced scorecard is gaining momentum, with about two-thirds of Canadian companies using this method.63 The balanced scorecard rests on the assumption that any successful business satisfies the requirements of investors (financial performance measures), cus- tomers (market share, customer commitment, and retention), and employees (employee satisfaction and organization commitment).64

The idea of a balanced scorecard arose from the idea that financial measures alone do not capture the true performance of an organization, and that these measures tend to reflect past performance and are not necessarily predictive. Other measures deemed of value to the analysis of a company included not only financial performance but also customer satisfaction and employee engagement. The balanced scorecard provides answers to these four basic questions:

1. How do customers see us? (The customer perspective) 2. What must we excel at? (The internal business perspective) 3. Can we continue to improve and create value? (Innovation and learning

perspective) 4. How do we look to shareholders? (The financial perspective)65

The process starts with the organization’s strategy and then HR looks for ways that the HR processes and practices can support that strategy. What can HR do to support the organization’s goals, and how can this be measured? For example, the goal at a pipeline company was to increase revenues; one way to accomplish this was to reduce downtime for repairs. The HR goals in this case were to increase the amount of time devoted to preventive maintenance, by increasing employee skills sets in repairs, and to change the compensation system to include incentives to perform preventive main- tenance.66 This set of linkages is more fully described in Figure 14.2.

Balanced scorecard A balanced set of mea- sures to show contribu- tion to organizational performance

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MEASURING THE WORTH OF EMPLOYEES Many company presidents say, “Employees are our greatest assets,” or, as the presi- dent of Dofasco said, “Our product is steel; our strength is people.” What do they mean? Analysts posit that human capital and financial capital drive business results. Human capital can refer to factors such as the employees’ knowledge, skills, capabili- ties, and attitudes that impact performance.67 Remember that it is not just the sum total of employee competencies, but also the application of these competencies in a way that has value to the organization, that provides the true measure of human capital.68

The productivity of most organizations entering the 21st century is highly dependent on the intellectual capabilities of their employees. The balance sheet cannot capture the value of this human capital. As indicated earlier, this human capital represents a significant asset, representing up to 85 percent of a corporation’s value.69

There have been attempts to measure the worth of employees by counting them, and then attempting to put a number value on their knowledge. Those who measure the worth of employees want to bring attention to the fact that human resources are of strategic and competitive importance. Another reason is that the value of these resources must be expressed in financial terms to bring credibility to the HR department.70

Assessing the worth of intellectual capital or human capital in an organization is incredibly complex and still in the developing stages to produce meaningful measures

Organization Goal

Increase revenues

Increase customer repeat

business

Decrease downtime in

repairs

Increase preventive

maintenance

Improve employee

skills

Increase incentives

Increase customer

satisfaction

FIGURE 14.2

HR DELIVERABLES LINKED TO STRATEGY

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Strategic Human Resources Planning NEL390

and none are universally accepted. Our focus here is not on measuring the worth of employees, but on measuring the effect of HR practices and policies.

Readers interested in a fuller description of measuring HR effectiveness should consult Research, Measurement and Evaluation of Human Resources.71 The choice of measurement tool depends to a large extent on the organization’s strategy and the stage of sophistication of its HR department. For example, an HR department that continues to focus on administration in a support role to employees and managers will measure efficiencies. Reports from HR will include statements such as “ Processed 1250 benefits questions; trained 10 percent more employees than last year.” An HR department that is a business partner with line management will measure cul- ture and employee productivity, and will establish direct links with organizational performance.

The measurement options available to HR professionals are summarized in Table 14.1. The first approach examines the efficiency of the HR operations. The second is an effectiveness measure, looking at the link between individual HR practices and a specific financial outcome. The third approach is the HR scorecard approach tying HR activities to business activities. The last approach is the cause-and-effect analysis, which focuses on measuring the links between HR programs, the links to employee links, and business outcomes.

The columns in the table list example measures and advantages of each approach, and then expose the limitations by asking tough questions.

The measurement of HR effectiveness is not easy. The next section outlines some of the difficulties faced by those attempting to track HR effectiveness.

UNIVERSALITY OF BEST PRACTICES No single best practice works in every situation. Some companies, such as banks, consist of many different companies, all with unique characteristics; in the case of banks, these companies include insurance companies, discount brokerages, and venture capital firms. The HRM policies and practices that benefit performance in the bank may hinder performance in the venture capital arm. The environment and culture of the parts of the larger company are very different. For example, the routine transaction work of the bank lends itself to compensation systems based largely on base salaries, while the entrepreneurial, risk-taking nature of the venture capital firm cries out for incentive-based pay.

Furthermore, organizations and businesses may have different strategic goals. The goal of the financial sector is to maximize ROE, while the goal of Citizenship and Immigration Canada might be to implement the government’s immigration policy, which might include increasing the number of immigrants with certain skills. Within a single organization, the goals of one business unit might be to maximize market share (at the expense of profit), while another unit might be attempting to maximize profit. These differences lead to the conclusion that the impact of HRM must be measured against unit goals, not against some generality such as growth or profits. Moreover, some experts suggest that organizations not adopt best practices, but focus on fit. They argue that aligning HR practices with an organization’s strategy (influenced by its environment) will result in greater performance than the method of copying other HR strategies (best practices and benchmarking).72 This is described in Figure 14.3.

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NEL 391CHAPTER 14 HR Assessment and Analytics

MEASUREMENT APPROACH

EXAMPLE MEASURES PRIMARY APPEAL TOUGH QUESTIONS

Efficiency of HRM operations

Cost-per-hire, time- to-fill, training costs, ratio of HR staff to total employees

Explicit currency- value calculations. Logic of cost savings is easy to relate to accounting. Standard- ization makes bench- marking comparisons easier.

“Wouldn’t outsourcing cut costs even more?” “Do these cost sav- ings come at the price of workforce value?” “Why should our costs be the same as the industry’s?”

HR activity, “best practice” indices

Human capital benchmarks, human capital index

HR practices are associated with familiar financial outcomes. Data from many organizations lends credibility. Sug- gests there might be practices or combina- tions that generally raise profits or sales, and so on.

“What is the logic connecting these activities with such huge financial effects?” “Will the practices that worked in other organizations neces- sarily work in ours?” “Does having these practices mean they are implemented well?”

HR scorecard How the organization or HR function meets goals of “customers, financial markets, operational excel- lence, and learning”

Vast array of HR measures can be cat- egorized. “Balanced scorecard” concept is known to business leaders. Software allows users to cus- tomize analysis.

“Can this scorecard prove a connection between people and strategic outcomes?” “Which numbers and drilldowns are most critical to our success?”

Causal chain Models linking employee attitudes to service behav- iour to customer responses to profit

Useful logic linking employee variables to financial out- comes. Valuable for organizing and ana- lyzing diverse data elements.

“Is this the best path from talent to profits?” “How do our HR prac- tices work together?” “What logic can we use to find more con- nections like this?”

Source: From M. Effron, R. Gandossy, and M. Goldsmith, HR Measurement Alternatives (New York: John Wiley, 2003), p. 85. Reprinted with permission.

TABLE 14.1

SUMMARY OF HR MEASUREMENT ALTERNATIVES

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Strategic Human Resources Planning NEL392

SEPARATION OF CAUSE AND EFFECT The perennial problem in measuring the impact of HRM practices is separating cause and effect. For example, if a profitable company shares its profits with employees through bonuses, does the possibility of earning such a bonus make employees more productive and their companies more profitable? Research suggests that businesses that are profit- able invest in HR practices and that this investment pays off in improved financial performance.73 However, once a new HR practice is implemented, it may take years before its effects are observed. Experts have suggested that it takes two years to design and deliver an HR program and another two years before an organizational outcome can be measured.74 Obviously, a leading indicator is more valuable for predicting future performance than a lagging indicator, as discussed in HR Planning Notebook 14.9.

Associated with the lack of confidence in the explanation of causal links between specific HRM practices and organizational performance is the observation that the cul- ture of an organization may explain more than a specific HRM practice. The day-to-day norms of an organization may influence employee behaviour more than any specific practice. For example, if an organization is deeply committed to valuing employees, the day-to-day actions of all managers have more powerful effects than a standalone program such as 360° feedback. Other challenges are outlined in HR Planning Notebook 14.10.

FIGURE 14.3

TWO APPROACHES: FIT OR BEST PRACTICE

Fit Approach Best Practice Approach

Environment

Business strategy

Environment External HR

practices and benchmarks

Business strategy

HR strategyHR strategy

HR practices and investments tailored

and scaled to the business context, and change with it

HR practices and policies overly influenced by competitors and

benchmarks, often out of scale with the needs or appetite of the business, and perceived as too expensive

Source: Originally published in Al-Karim Samani and Pardubyal Singh, People and Strategy, 34.1 (March 2011), p. 34. © 2011, Society for Human Resource Management, Alexandria, VA. Used with permission. All rights reserved.

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NEL 393CHAPTER 14 HR Assessment and Analytics

SUCCESSFUL MEASUREMENT As you have just read, there are many ways to measure the contributions of the HR func- tion. Organizations seem to focus on background, functional, and efficiency measures. According to a study of Canadian leaders, the most frequent measures are headcount and hires and terminations.75 Other popular operational measures can be found in HR Planning Today 14.2.

Unlike the accounting profession, which has a set of accounting principles used and understood universally, the HR profession has yet to create a set of generic measures. A recent study identified three hurdles to the development of these HR metrics:

1. Identifying measures that are grounded in research and theory and are practical

2. Gaining acceptance of these measures by the stakeholders 3. Applying these measures consistently and over time76

HR PLANNING NOTEBOOK 14.9

LEADING AND LAGGING INDICATORS

HR professionals need to be able to understand the link between HR activities and results. For example, is turn- over a leading or a lagging indicator? A leading indicator anticipates, predicts, or affects the future. Higher employee turnover can precede outcomes such as lower customer

satisfaction, which in turn can predict lower customer retention and sales. A lagging indicator represents infor- mation that results from an event or a change. The lagging indicators in the above example are the lower customer satisfaction, retention, and sales.

Source: Adapted from material originally published in N. Lockwood, People & Strategy: The Journal of the Human Resource Planning Society, Issue!9, September 2006. © 2006, Society for Human Resource Management, Alexandria, VA. Used with permission. All rights reserved.

HR PLANNING NOTEBOOK 14.10

CHALLENGES OF EVALUATING HRM

• The work of assessing HR practices is costly; it can add 5 percent to the HR budget.

• HR professionals may not have the time or skills to evaluate.

• HR is not solely responsible for the behaviour of employees. A weak manager may influence pro- ductivity more than any HR practice.

• The numbers game—do the numbers reflect reality? Customers have been asked by service providers to give them a good rating when the evaluation agency phones, as their bonus depends on receiving a 10 out of 10.

• What if the result shows no impact of HR prac- tices? How will this information be used? What is the risk to the HR professional’s career?

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Strategic Human Resources Planning NEL394

However, the Society for Human Resources Management (with 250 000 members) is preparing guidelines for standardized measures of HR metrics in an attempt to codify metrics already used by HR professionals and increase benchmarking.77

There has been a tendency for HR practitioners to report isolated or averaged numbers, which are meaningless to managers. A meaningful measure is one that allows the managers to identify and solve the problems and report the results.78

Whatever measure you decide to use should have the following characteristics:

• Alignment: The measure and the potential results must offer some value to the strategy or goals of the organization. Measuring the ratio of HR professionals to the number of employees does not. Measuring the impact of the perfor- mance management system on customer satisfaction does. If your organiza- tion does not have clear goals, then choose metrics that are meaningful. Why measure cost per hire if you don’t know if this number should be increased or decreased? Decreasing it might result in less qualified candidates who are easier to find, but ultimately result in poor quality work or increased turnover, thus increasing costs. In other words, the full cost of reducing or increasing these measures must be calculated.

• Actionable: As Albert Einstein said, “Not everything that can be counted counts, and not everything that counts can be counted.” Choose only those measures that you can control. Why choose to measure work–life balance issues if your organization is not prepared to make sub- stantial investments in changing working hours or options? Obtain metrics

HR PLANNING TODAY 14.2

POPULAR HR MEASURES

According to the Global Human Capital Study 2008, the most frequently reported measures are as follows:

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Employee retention/turnover

Employee engagement/satisfaction

Cost per employee

Labour costs/capital costs

Customer satisfaction/loyalty

Revenue per employee

Units of output per employee

Percentage of employees utilized

Metrics not used to evaluate workforce effectiveness

0 10 20 30 40 50 60 70 80

Source: IBM Global Business Services, “Unlocking the DNA of the Adaptable Workforce,” The Global Human Capital Study 2008, p. 43. Reprint Cour- tesy of International Business Machines Corporation, © 2008 International Business Machines Corporation.

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NEL 395CHAPTER 14 HR Assessment and Analytics

on things like employee commitment or turnover, items for which you can develop action plans.

• Trackability: A good metric must be trackable over time so that improvements, as a result of the introduction of solutions, can be assessed. Some measures, such as time to hire, should be tracked weekly for all positions; others, like employee engagement, may be tracked semiannually with a stratified sample.79

• Comparability: Try to choose measures that can be compared across units and even with best-in-world organizations. To obtain an employee engagement number of 4.5 is not helpful, unless you know that this is lower than in other departments, and much lower than, for example, that of the best employers.

• Drill deep: An average turnover figure of 10 percent is meaningless. You need to know that the turnover rate for new hires is 50 percent (a serious problem) while the turnover rate for key executives is 5 percent (not a problem). Employee engagement scores of 90 percent for the company may hide the fact that the operation in Jasper, Alberta, is at only 15 percent.

• Report and communicate a limited number of measures: The availability of databases allows us to accumulate mountains of data, but very little meaningful informa- tion. Information overload is a more serious problem than not measuring at all. Decide on 5 to 10 key measures, and report on these in the same way over time. This should be both historical (lag) and predictive (lead) measures. These key metrics almost always include indices of employee engagement, retention rates by occupational group and unit, absenteeism by occupational group and unit, productivity measures, and cost–benefit analyses for the introduction of any new program.

Another approach might be to listen to the questions being asked by line managers, such as “How can I improve the quality of our service?” and provide programs and then measure these programs to prove the increase in quality service.

All these measures can be arranged in a hierarchy:

Level 1: Basic data—headcounts, number of positions etc.

Level 2: Operational data—training days, number of grievances etc.

Level 3: Employee data—levels of engagement, absenteeism, turnover etc.

Level 4: Organizational data—the correlations between turnover and sales; between engagement and unit performance80 etc.

Each of these levels is of interest to different levels in the organization, and would be provided to those managers. The reporting of measures may differ not only by level but by strategy. One study found that companies with a differentiation strategy preferred to receive measures of employee innovative capacities, while those with a cost leader strategy wanted measures of their employees’ abilities to manage costs.81 The lesson here is that the metrics provided have to be of value to the recipients.

The HR department can increase its credibility and power to help managers, and change the perception of the function from a cost centre to one that contributes to profits. HR professionals should continually identify instances of contribution such as “That executive search would have cost the organization $50 000, and we did it for

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Strategic Human Resources Planning NEL396

$10 000”; “We have worked with the union and reduced grievances by 20 percent, saving 1500 hours of managerial time”; and “We changed our benefits provider and saved the company 10 percent.”82

At this time, metrics seem to inform strategy rather than drive it. Measurement is the key to the management of human capital, and the art of managing people is turning into the science of HRM. This trend will continue as more HR practitioners will be well educated in their discipline, certified and regulated, and adept at validating their profession through the measurement of its activities.

REPORTING TO BOARDS OF DIRECTORS AND SHAREHOLDERS Increasingly, external stakeholders want to know the human capital num- bers, because they know that these are often linked to the future per- formance of the organization. For example, Aviva, the world’s fifth- largest insurance group, provides the following information:

• Percentage of employees who consider that management sup- ports diversity in the workplace

• Percentage of staff who feel that employees in the business are treated with respect

• Percentage of employees who participated in the Global Employee Climate Survey and rated us favourably on leadership index and engagement index83

// THE FUTURE OF HR ANALYTICS It is apparent that the numbers that the HR department used to generate (such as number of people trained) now seem as if they come from the Stone Age. Currently, HR professionals are generating data establishing the effectiveness and efficiency of the HR programs. What is trending now is the establishment of units where HR data is tightly linked to operational data, and the data is used to drive programs to meet organizational objectives. The number and type of data sources will rise and will be used to predict employee behaviour and fully integrated into operational decision making. Table 14.2 neatly summarizes the current state and the “desired future” state of HR analytics.

With analytical skills, HR professionals will contribute significantly to the success of organizations.

Stakeholders are interested in data to establish the worth of HR programs.

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NEL 397CHAPTER 14 HR Assessment and Analytics

OLD RULES NEW RULES

People analytics is viewed as an HR team focused on advanced analytics within HR

People analytics is viewed as a business analytics team that works across the busi- ness to drive business results

Analytics focuses on HR topics such as retention, engagement, learning, and recruitment metrics

Analytics focuses on business problems such as sales productivity, workforce effec- tiveness, high-potential retention, fraud, accident patterns, and other operational needs

The organization makes a business case for better data integration, quality, and tools

The organization has already committed to accurate and integrated data, and has tools and processes to ease of analysis

The people analytics team has a strong understanding of HR data

The people analytics team understands HR!data, financial data, and customer data, and it has relationships with all the other analytics groups in the company

The people analytics team lives in HR operations and reports to HR technology, or in functional areas

The people analytics team operates at a senior level, reports to the CHRO, and serves business leaders across the company

The people analytics team is a small set of technical experts with data management and statistical skills

The people analytics team is a multidis- ciplinary team with a focus on business consulting, visual communications, and problem solving

People analytics is staffed by PhD statisti- cians whose primary focus is the develop- ment of models and data warehouses

People analytics is a consulting function that helps business leaders solve problems

People analytics focuses on employees People analytics focuses on the entire workforce, including employees and contin- gent labour

The people analytics team focuses heavily on engagement survey data and employee happiness and culture

The people analytics team moves beyond engagement to understand the detailed drivers of engagement and builds culture models to understand what drives the workforce

Source: Rewriting the Rules for the Digital Age: 2017 Deloitte Global Human Capital Trends, p. 103, https://www2.deloitte.com/ content/dam/Deloitte/global/Documents/About-Deloitte/central-europe/ce-global-human-capital-trends.pdf.

TABLE 14.2

PEOPLE ANALYTICS: OLD RULES VS. NEW RULES

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398 NELStrategic Human Resources Planning

// SUMMARY This chapter attempts to close the loop in the strategic HR planning process by exam- ining assessment; when managers implement a plan, they need to know whether the plan was successful. In addition, it is important to measure the impact of HRM so as to prove the value of HR and to improve its performance. The 5C model for measuring HR effectiveness has five areas: compliance with laws and regulations, client satisfaction, culture management, cost control, and contribution. Methods to measure the impact of HRM include cost–benefit analysis, utility analysis, and audits. Benchmarking is a valuable tool that provides comparative data on key ideas and stimulates discussion about better ways to operate. However, there are challenges in measuring HR effective- ness: Overall organization goals might not be applicable to all branches or subsidiary companies; it is difficult to relate cause and effect; and some HR professionals do not see the benefit in such measuring. The chapter concludes with a discussion of ensuring that the metrics chosen have value to stakeholders in the organization.

KEY TERMS attitudes p. 377 audit p. 386 balanced scorecard p. 388 benchmarking p. 387 cost–benefit analysis p. 384 direct costs p. 384 efficiency p. 379 HR analytics p. 369 indirect costs p. 385 ROE p. 382 ROI p. 382 utility analysis p. 385 workforce analytics p. 368

WEB LINKS 1. Canadian HR associations have published a detailed list of HR metrics, including defini-

tions and formula for calculation, at HR Metrics Service: http://www.hrmetricsservice .org/metrics

2. John Sullivan, a noted expert on HR, also publishes a list of the best metrics for a large orga- nization at https://www.ere.net/what-are-the-best-hr-metrics-for-a-large-organization

3. For more information on evidence-based decision making, consult the website of the Centre for Evidence-based Management at https://www.cebma.org

DISCUSSION QUESTIONS 1. Your HR director has asked you to determine whether your organization (a group of

about 50 non-unionized, full-time managers and professionals working in scientific services in Alberta) has an absenteeism problem. You go to the Statistics Canada

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399CHAPTER 14 HR Assessment and Analytics NEL

website and search for absenteeism data from the Labour Force Survey, where you are happy to discover that the average absenteeism rate in Canada (in 2011) is 9.3 days, and the employees in your organizations take an average of 9 days per year. Therefore, you do not have an absenteeism problem. Your manager tells you to “drill down.” In other words, she wants data on the absenteeism rates by sector, by occupation, and so on. Does your organization have an absenteeism problem?

2. A company wishes to increase the sales performance of its staff. It has been determined that for each $15 product sold, the company makes $5 in profit. Currently, employees who are paid $20 an hour sell an average of four products an hour. A consultant is persuading the company to purchase a four-hour training course. The consultant guarantees that sales capacity will increase by 25 percent and that the effect will last one year (50 weeks of selling time, assuming an eight-hour day). The cost of the course is $400 per employee. Should the company buy the training course for its 10 sales representatives? Conduct a cost–benefit analysis to determine the answer.

3. The Canada HR Centre provides a turnover calculator for estimating the costs of an employee quitting. In groups, choose a real job (for which you have compensation information) and calculate the cost of turnover for this position.

EXERCISE 1. You are the HR manager of a retail organization with 10 000 employees across

Canada. The executive team and the board of directors want you to prepare an annual HR report. Choose 10 measures that you want to include in the report. Explain why you chose these, how you will measure them, and why this information will be useful for the executives and directors to know. (The web links suggested above may be helpful.)

Frito-Lay, a manufacturer of well-known brands such as Ruffles and Doritos, is a divi- sion of PepsiCo, which employs about 10 000 people across Canada. An employee group, called the Route Sales Representatives, was considered a key talent group. A Route Sales Representative (RSR) performed three key tasks:

1. Driving and delivery—taking the products from distribution centres to stores

2. Merchandising—managing in-store inventory and product placement 3. Sales—taking orders and negotiating for additional shelf space in order

to increase sales

However, Frito-Lay was experiencing low productivity and high turnover among this group. Frito-Lay decided to use workforce analytics to identify the source of the problems. The company surveyed both the RSRs and their super- visors, and analyzed recruitment sources and successes, and the characteristics of successful RSRs.

TALENT MANAGEMENT AND WORKFORCE ANALYTICS AT FRITO-LAY

CASE STUDY 1

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400 NELStrategic Human Resources Planning

Certified Management Accountants of Ontario (CMAO) provides the CMA des- ignation to certify professional accountants and resources to optimize enterprise performance. CMA of Ontario has approximately 25 000 members. CMA Ontario has 83 employees and has doubled in size from five years ago. Its annual revenue has also doubled from five years ago when a new strategic vision was adapted and propelled the not-for-profit organization to perform like a Fortune 500 company. Development at CMA has been fuelled by the need to offer members and prospects more value with an aggressive growth target of 5 percent annually.

“If we are going to compete in today’s marketplace, it’s not enough to be a sleepy not-for-profit. We must operate similarly to our membership, many of whom are running successful Canadian businesses,” says Christine Thrussell, Manager of Human Resources for CMA Ontario, who recalls the push for change when she first started with the organization. Thrussell made it her objective to be a designation of choice for employees in the not-for-profit sector. “To be competitive, we have to ensure we have the resources employees are looking for.”

As part of having the necessary resources, CMA Ontario knew the importance of having a culture to support new work designs. As a result, it was important to the leadership to tap into how their employees valued their workplace. In combination with its balanced scorecard system, CMA Ontario implemented a culture audit assessing employee satisfaction with technology, training, benefits, etc.

CASE STUDY 2 MEASURING CULTURE TO SUPPORT GROWTH AT!CMA

Using advanced statistical techniques, the work uncovered several causes. Their traditional labour pool of high school graduates was shrinking, at the same time as the complexity of the job was increasing. The company began increasing the com- pensation rate to reflect the new job demands. It also found that on larger routes, the RSR was unable to find the time to merchandise, so a dedicated merchandiser was hired for these large routes. Analyzing the profiles of successful candidates resulted in a change to the hiring profile to include prior sales experience.

This process of analysis required a great deal of managerial and employee commitment, and a time frame of about six months.

Source: Based on Levenson, A. “Using Targeted Analytics to Improve Talent Decisions,” People and Strategy, 34, 2, June 2011, p. 34. http://pepsico.ca/en/brands/frito-lay-canada.html.

QUESTIONS 1. What methods were used in this case to identify the causes of high turn-

over and low productivity? What other methods could have been used to obtain better data?

2. Though their efforts resulted in improved retention and productivity, what is missing from this case?

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// REFERENCES 1. Bersin by Deloitte. “Organizations with High Impact Talent Analytics

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37. Colgate, M. 2014. “Cracking the Customer Service Code.” The Globe and Mail. October 3. B12.

38. Gable, S.Y., S. Chyung, A. Marker, and D. Winiecki. 2010. “How Should Organizational Leaders Use Employee Engagement Surveys? Performance Improvement, Vol. 49, No. 4: 17–25.

39. Caudron, S. 2001. “How HR Drives Profits.” Workforce, Vol. 80, No. 12: 26–31.

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41. Rison, R.P., and J. Tower. 2005. “How to Reduce the Cost of HR and Continue to Provide Value.” Human Resource Planning, Vol. 28, No. 1: 14–18.

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43. Krell, E. 2011. “5 ways to Manage Turnover.” HR Magazine, Vol. 57, No. 4: 63–65. 44. Fitz-Enz. 2000. 45. Guest, D., J. Michie, M. Sheenan, and N. Conway. 2003. “A UK Study of

the Relationship Between Human Resources Management and Corporate Performance.” British Journal of Industrial Relations, Vol. 41: 291–314.

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47. Welbourne and Andrews. 1996. 48. Delaney, J.T., and M.A. Huselid. 1996. “The Impact of Human Resource

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49. Powell, T.C. 1992. “Organizational Alignment as Competitive Advantage.” Strategic Management Journal, Vol. 13: 119–134.

50. Templer, A., and R.J. Cattaneo. 1995. “A Model of Human Resource Management Effectiveness.” Canadian Journal of Administrative Studies, Vol. 12, No. 1: 77–88.

51. Ibid.: 79. 52. Brealey, R., and S. Meyers. 1991. Principles of Corporate Finance (3rd ed.).

New York: McGraw-Hill. 53. See A. Saks, Research, Measurement and Evaluation of Human Resources

(Toronto: Thomson Nelson, 2000) for a detailed treatment of decision making using utility analysis.

54. Tyler, K. 2001. “Evaluate Your Next Move.” HR Magazine, Vol. 46, No. 11: 66–71.

55. Pemberton, J.D., G.H. Stonehouse, and D.J. Yarrow. 2001. “Benchmarking and the Role of Organizational Learning in Developing Competitive Advantage.” Knowledge and Process Management, Vol. 8, No. 2: 123–135.

56. Moffett, S., K. Anderson-Gillespie, and R. McAdam. 2008. “Benchmarking and Performance Measurement: A Statistical Analysis.” Benchmarking: An International Journal, Vol. 15, No. 4: 368–381.

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a Benchmarking Process.” Benchmarking: An International Journal, Vol. 12, No. 1: 45–60.

59. Thomlinson, A. 2014. Learning and Development Outlook 2014: Strong Learning Organizations, Strong Leadership, The Conference Board of Canada. February 18.

60. Becker, B., and M. Huselid. 2003. “Measuring HR?” HR Magazine, Vol. 48, No. 12: 56–66.

61. “Apple Has Biggest Slice of Profits per Employee.” 2014. New York Post. (February 28). http://nypost.com/2014/02/28/apple-has-biggest-slice-of- profits-per-employee. Retrieved March 16, 2018.

62. Woodcock C.P., and P.W. Beamish. 2003. Concepts in Strategic Management (6th ed.). Toronto: McGraw-Hill Ryerson.

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64. Ulrich, D. 1997. “Measuring Human Resources: An Overview of Practice and a Prescription for Results.” Human Resource Management, Vol. 36, No. 3 (Fall): 303–320.

65. Kaplan, R.S., and D.R. Norton. 2005. “The Balanced Scorecard: Measures That Drive Performance.” Reprinted in Harvard Business Review, Vol. 83, No. 7: 1–10.

66. Becker, B., M.A. Huselid, and D. Ulrich. 2001. The HR Scorecard: Linking People, Strategy and Performance. Boston: Harvard Business School Press.

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405CHAPTER 14 HR Assessment and Analytics NEL

67. Chen, J., Z. Zhu, and H.Y. Xie. 2004. “Measuring Intellectual Capital: A New Model and Empirical Study.” Journal of Intellectual Capital, Vol. 5, No. 1: 195–212.

68. Elias, J. 2004. “Evaluating Human Capital: An Exploratory Study of Management Practice.” Human Resource Management Journal, Vol. 14, No. 4: 21–40.

69. DiBernardino, F. 2011. “The Missing Link: Measuring and Managing Financial Performance of the Human Capital Investment.” People and Strategy, Vol. 34, No. 2 (June): 44.

70. Bullen, M., and K.A. Eyler, 2010. “Human Resource Accounting and International Development.” Journal of International Business and Cultural Studies, Vol. 22, No. 1: 1–16.

71. Saks, A.M. 2000. Research, Measurement and Evaluation of Human Resources. Toronto: ITP Nelson.

72. Samnanai, A.K., and Singh, P. 2011 “Stop Chasing Best Practices: Focus on Fit for Your HR Function.” People and Strategy, Vol. 34, No. 1.

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Business Unit Performance Using Employee Surveys: Monitoring HRM Related Changes.” Human Resource Management Journal, Vol. 20, No. 1: 44–63.

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and Performance: HR Managers’ Perceptions.” Accounting, Auditing, and Accountability Journal, Vol. 23, No. 1: 111–132.

82. Cascio, W.F. 2000. Costing Human Resources (4th ed.). Cincinnati: South-Western College Printing.

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Acquisition The purchase of one company by another. (p. 8)

Action research An iterative trial-and-error process of discovery that involves diagnosing a problem, planning a solution, acting on the solution, evaluating the results of the actions, learning from the outcomes, and asking new questions. (p. 234)

Adaptive IHRM approach HRM systems for foreign subsidiaries that will be consistent with the local economic, political, and legal environment. (p. 291)

Artificial intelligence A software-based ability to demonstrate learning and decision making. (p. 206)

Attitudes Perceptions or opinions about organizational characteristics. (p. 377)

Attrition The process of reducing an HR surplus by allowing the size of the workforce to decline naturally because of the normal pattern of losses associated with retirements, deaths, and voluntary turnover. (p. 97)

Audit A measurement method that assesses progress against plan. (p. 386)

Balanced scorecard A balanced set of measures to show contribution to organizational performance. (p. 388)

Bankruptcy A formal procedure in which an appointed trustee in bankruptcy takes possession of a business’s assets and disposes of them in an orderly fashion. (p. 7)

Benchmarking A process that can enhance organizational performance by establishing standards against which processes, products, and performance can be compared and improved. (p.387)

Big data The integration of digitized data from multiple sources and in multiple formats, including structured and unstructured data. (p. 203)

Bullwhip effect When errors in estimating the supply of human capital are amplified along the supply chain, resulting in large overestimates of hiring needs. (p. 156)

Business intelligence The applications and technologies for gathering, storing, analyzing, and providing access to data to help users make better business decisions. (p. 207)

Business strategy Plans to build a competitive focus in one line of business. (p. 10)

Capabilities A complex combination of people and processes that represent the firm’s capacity to exploit resources that have been specially integrated to achieve a desired result. (p. 16)

Competitive advantage The characteristics of a firm that enable it to earn higher rates of profit than its competitors. (p. 15)

Competitive intelligence A formal approach to obtain information about competitors. (p. 61)

Conglomerate merger The merger of two organizations competing in different markets. (p. 317)

Consolidation The joining of two or more organizations to form a new organization. (p. 318)

Contingency plans Plans to be implemented when severe, unanticipated changes to organizational or environmental factors completely negate the usefulness of the existing HR forecasting predictions or projections. (p. 95)

Core competencies Resources and capabilities that serve as a firm’s competitive advantage. (p. 17)

Corporate strategy Organizational-level decisions that focus on long-term survival. (p. 6)

Cost–benefit analysis The relationship between the costs of a program and its benefits. (p. 384)

Culture The set of important beliefs that members of an organization share. (p. 326)

Delphi technique A process in which the forecasts and judgments of a selected group of experts are solicited and summarized in an attempt to determine the future HR demand. (p. 121)

Demand forecasting The process of determining the organization’s requirement for specific forms of human capital. (p. 91)

Demographics The study of population statistics. (p. 67)

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GLOSSARY

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GLOSSARY

External supply Members of the workforce not currently employed by the firm, who are currently undergoing training, working for competitors, members of unions or professional associations, in a transitional stage, between jobs, or unemployed. (p. 136)

Force-field analysis A framework for analyzing a problem that seeks to identify all the relevant factors and stakeholders that are acting to either sustain the current state or to move away from the current state. (p. 232)

Generic human capital The competencies, knowledge, skills, and abilities that are held by individual employees and that are useful to the firm. (p. 86)

Global strategy Introducing culturally sensitive products in chosen countries with the least amount of cost. (p. 292)

Home-country nationals (HCNs) Individuals from the subsidiary country who know the foreign cultural environment well. (p. 299)

Horizontal integration The merger or acquisition of rivals. (p. 320)

Horizontal merger The merging of two competitors. (p. 316)

HR analytics An evidence-based approach for making better decisions about employees and HR policies, using a variety of tools to report HR metrics and to predict outcomes of HR programs. (p. 369)

HR budgets Quantitative, operational, or short-run demand estimates that contain the number and types of jobs required by the organization as a whole and for each subunit, division, or department. (p. 124)

HR dashboard An aggregation of useful or relevant HR metrics or performance indicators that provide a summary snapshot of performance. (p. 210)

HR forecasting Determining the net requirement for human capital by assessing the demand for and supply of human resources now and in the future. (p. 81)

HR gap A shortage of human capital such that the organization is unable to meet its current or forecasted human capital requirements. (p. 83)

HR metrics Summary measures of HR outcomes that are relevant to the performance of the HR function. Example metrics include the cost of recruitment, time-to-hire, and turnover rate. (p. 207)

HR surplus A situation in which the organization has more human capital than it requires in order to meet its current or forecasted human capital requirements. (p. 83)

Designated groups Groups deemed to require special attention due to the persistent disadvantages they face in the labour market; the four designated groups include people of Aboriginal descent, women, persons with disabilities, and members of visible minorities. (p. 89)

Direct costs The hard costs that can be measured by expenditures. (p. 384)

Distributive justice The fairness of the downsizing decision. (p. 267)

Divestiture The sale of a division or part of an organization. (p. 7)

Domestic strategy Internationalizing by exporting goods abroad as a means of seeking new markets. (p. 291)

Double-loop learning A method of learning that involves questioning current assumptions, examining a problem from different perspectives, and questioning the validity of the problem. (p. 225)

Downsizing Activities undertaken to improve organizational efficiency, productivity, and/or competitiveness that affect the size of the firm’s workforce, its costs, and its work processes. (p. 255)

Downsizing strategy Strategy to improve an organization’s efficiency by reducing the workforce, redesigning the work, or changing the systems of the organization. (p. 254)

Dynamic capabilities The ability to adapt and renew competencies in accordance with changing business environment. (p. 17)

Efficiency Results achieved compared to resource inputs. (p. 379)

Emergent strategy The plan that changes incrementally due to environmental changes. (p. 4)

Employee segmentation The grouping of employees based on characteristics that are relevant to the employee experience such as career preferences, demographics, work–life preferences, or benefits. (p. 137)

Enterprise portals Knowledge communities that allow employees from a single or multiple companies to access and benefit from specialized knowledge associated with tasks. (p. 201)

Enterprise resource planning (ERP) Commercial software systems that automate and integrate many or most of a firm’s business processes. (p. 203)

Envelope The range of plausible values of a prediction based on a given set of assumptions. (p. 94)

Environmental scanning Systematic monitoring of trends affecting the organization. (p. 57)

Exportive IHRM approach Transferring home HRM systems to foreign subsidiaries without modifying or adapting to the local environment. (p. 291)

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GLOSSARY

KSAOs The knowledge, skills, abilities, and other characteristics that are necessary for a person to perform well in a job. Also referred to as job specifications, KSAOs are derived from job analysis. (p. 82)

Linear programming A complex mathematical procedure commonly used for project analysis in engineering and business applications; it can determine an optimum or best-supply mix solution to minimize costs or other constraints. (p. 149)

Liquidation The termination of a business and the sale of its assets. (p. 7)

Management inventory An individualized personnel record for managerial, professional, or technical personnel that includes all elements in the skills inventory with the addition of information on specialized duties, responsibilities, and accountabilities. (p. 145)

Markov model A model that determines the pattern of employee movement using a set of mutually exclusive states for movement into or out of a particular job. (p. 146)

Mass customization of HR The ability to customize HR practices at the employee level efficiently and at low cost. (p. 143)

Mental model An internal representation of the way things work. Mental models influence the causal attributions that we make. (p. 243)

Mentors Executives who coach, advise, and encourage junior employees. (p. 182)

Merger Two organizations combine resources and become one. (p. 8)

Mission statement An articulation of the purpose of the organization and the value it creates for customers. (p. 11)

Movement analysis A technique used to analyze the chain or ripple effect that promotions or job losses have on the movements of employees. (p. 150)

Moving As the second stage of a change process, the moving stage involves the trial-and-error process of taking action to move the firm through the intended change. (p. 237)

Multidomestic strategy A strategy that concentrates on the development of foreign markets by selling to foreign nationals. (p. 291)

Multinational strategy Standardizing the products and services around the world to gain efficiency. (p. 291)

Nominal group technique (NGT) Long-run forecasting technique utilizing expert assessments. (p. 121)

Open system A system that receives inputs from its external environment. (p. 223)

Operating synergy The cost reductions achieved by economies of scales produced by a merger or acquisition. (p. 318)

Human capital The sum of employees’ knowledge, skills, experience, and commitment invested in the organization. (p. 33)

Human capital flow The change in the stock of human capital over time. Factors that affect the flow of human capital include terminations, promotions, lateral movements, and demotions. (p. 87)

Human capital stock The amount of any specific form of human capital that is available to the firm at any given time. (p. 86)

HR demand The organization’s projected requirement for human capital. (p. 85)

Human resources information system (HRIS) A comprehensive across-the-board software system for HRM that includes subsystems or modules. (p. 202)

HR supply The source of human capital to meet demand requirements, obtained either internally (current members of the organization’s workforce) or from external agencies. (p. 86)

Indirect costs The soft costs whose value can be estimated but not measured easily by financial expenditures. (p. 385)

Information technology (IT) The hardware and software, including networking and communication technologies involved in storing, retrieving, and transmitting information. (p. 199)

Inplacement Reabsorbing excess or inappropriately placed workers into a restructured organization. (p. 262)

Integrative IHRM approach Combining home HR practices with local practices and selecting the most qualified people for the appropriate positions no matter where these candidates come from. (p. 292)

Intended strategy The formulated plan. (p. 4)

Interactional justice The interpersonal treatment employees receive during the implementation of the downsizing decision. (p. 267)

Internal supply Existing employees who can be retrained, promoted, transferred, or otherwise redeployed to fill anticipated future HR requirements. (p. 136)

Job rotations A process whereby an employee’s upward advancement in the hierarchy of an organization is achieved by lateral as well as vertical moves. (p. 180)

Job sharing When two or more employees perform the duties of one full-time position, each sharing the work activities on a part-time basis. (p. 97)

Key Performance Indicator (KPI) A snapshot measure of system performance that demonstrates the success of strategy implementation in terms of cost, quality, or time. (p. 211)

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GLOSSARY

Relational database A database that can share information across multiple tables or files, which allows the same information to exist in multiple files simultaneously. (p. 203)

Repatriation The process of PCNs, TCNs, or even HCNs returning to their home headquarters or home subsidiaries. (p. 304)

Request for proposal (RFP) Describes the responsibilities to be outsourced and invites potential providers to present their proposal for carrying out the job. (p. 357)

ROE Return on equity. (p. 382)

ROI Return on investment. (p. 382)

Scenario planning A method for imagining future possible organizational states and the resulting capabilities, activities, or strategies that are necessary to be successful in those future states. (p. 119)

Scenarios Proposed sequence of events with their own set of assumptions and associated program details. (p. 95)

Self-service A technology platform that enables employees and managers to access and modify their data via a web browser from a desktop or centralized kiosk. (p. 201)

Simulation A blend of qualitative and quantitative modelling that incorporates a set of assumptions about relationships among variables in a mathematical algorithm. Simulation can simultaneously model demand and supply, and is very useful for testing the impact of assumptions on the outcome of the model. (p. 127)

Single-loop learning The attempt to solve a problem using a single strategy, without examining the validity of the problem itself. (p. 224)

Skills gap A situation in which the supply of a particular form of human capital available to the firm is inadequate to address the demand. (p. 139)

Skills inventory An individualized personnel record held on each employee except those currently in management or professional positions. (p. 144)

Social networks The networks of ties that an individual has with other individuals. (p. 229)

Specialty products Software solutions for specific specialized applications that may or may not interface with the main database. (p. 203)

Staffing table Total HR demand requirement for operational or short-run time periods. (p. 125)

Stakeholders Groups of people who have vested interests in an organization’s decisions. (p. 70)

Outplacement Providing a program of counselling and job search assistance for workers who have been terminated. (p. 262)

Outsourcing A contractual relationship for the provision of business services by an external provider. (p. 346)

Parent-country nationals (PCNs) Individuals from headquarters who are highly familiar with the firm’s products and services, as well as with its corporate culture. (p. 299)

Personal mastery The understanding of one’s purpose and the development of a personal vision. (p. 242)

Prediction A single numerical estimate of HR requirements associated with a specific time horizon and set of assumptions. (p. 94)

Procedural justice Procedures or rules used to determine which employees will be downsized. (p. 267)

Procedures The steps required to get a job done. (p. 19)

Program The steps or activities necessary to accomplish a goal. (p. 19)

Projection Several HR estimates based on a variety of assumptions. (p. 94)

Promotion An employee’s upward advancement in the hierarchy of an organization. (p. 180)

Psychological contract An unwritten commitment between employers and their employees that historically guaranteed job security and rewards for loyal service. (p. 274)

Ratio analysis A quantitative method of projecting HR demand by analyzing the historical relationship between an operational index and the number of employees required. (p. 106)

Realized strategy The implemented plan. (p. 4)

Refreezing The third and final stage of a change initiative, refreezing involves putting policies, practices, and structures in place to establish new norms around the change. (p. 237)

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GLOSSARY

Transitional probability Calculated as the proportion of employees, or the number of employees who have historically resided in a given employment state divided by the total number of employees in the job. The transitional probability of termination for a job that has 10 employees and historically has seen 2 leave every year is 2/10, or 20 percent. (p. 147)

Trend analysis A forecasting method that extrapolates from historical trends. (p. 106)

Turnaround strategy An attempt to increase the viability of an organization. (p. 6)

Unfreezing As the initial stage of organizational change, unfreezing involves the development of a shared understanding among stakeholders that a particular change is necessary. (p. 235)

Utility analysis A method of determining the gain or loss that results from different approaches. (p. 385)

Vacancy, renewal, or sequencing model Analyzes flows of employees throughout the organization by examining inputs and outputs at each hierarchical or compensation level. (p. 152)

Value proposition A statement of the fundamental benefits of the products or services being offered in the marketplace. (p. 18)

Values The basic beliefs that govern individual and group behaviour in an organization. (p. 12)

Vertical integration The merger or acquisition of two organizations that have a buyer–seller relationship. (p. 320)

Vertical merger The merger of a buyer and a seller or supplier. (p. 317)

Vision statement A clear and compelling goal that unites an organization’s efforts. (p. 12)

Work redesign A medium-term strategy in which organizations focus on work processes and assess whether specific functions, products, and/or services should be eliminated. (p. 256)

Workforce analytics How HR metrics, such as turnover and employee engagement, are used to describe the workforce. (p. 368)

Workforce reduction A short-term strategy to cut the number of employees through attrition, early retirement or voluntary severance packages, and layoffs or terminations. (p. 255)

Strategic HRM Interrelated philosophies, policies, and practices that facilitate the attainment of organizational strategy. (p. 30)

Strategic implementation The process by which a strategy is put into action. (p. 19)

Strategic international HR planning Projecting global competence supply, forecasting global competence needs, and developing a blueprint to establish global competence pools within companies. (p. 290)

Strategic international HRM Human resources management issues, functions, policies, and practices that result from the strategic activities of multinational enterprises and that affect the international concerns and goals of those enterprises. (p. 291)

Strategy The formulation of organizational objectives, scopes, and action plans for gaining advantage. (p. 3)

Structural equation modelling A statistical technique that permits the testing of multiple relationships simultaneously in a theoretically derived model. (p. 117)

Succession management The systematic process of determining critical roles with the organization, identifying and evaluating possible successors, and developing them for these roles. (p. 166)

Supply forecasting The process of determining the source or sources of human capital to satisfy the organization’s demand. (p. 91)

Survivors Employees remaining with an organization after a downsizing. (p. 254)

Systematic change A long-term strategy that changes the organization’s culture and attitudes, and employees’ values, with the goals of reducing costs and enhancing quality. (p. 256)

Systems thinking Systems thinking views change issues within the framework of the entire organization. This view helps to understand the underlying causes of problems and the potential outcomes of change initiatives. (p. 244)

Takeover One company acquiring another company. (p. 318)

Team learning The interaction of individual ideas and efforts toward a team objective that results in outcomes that exceed the capabilities of any individual on the team. (p. 244)

Technology acceptance Extent to which users intend to or actually use technology as a regular part of their job. (p. 214)

Third-country nationals (TCNs) Individuals from a third country who have intensive international experience and know the corporate culture from previous working experience with corporate branches in a third country. (p. 299)

411NEL 411NEL

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412 NEL

business strategy, 10 HR competencies lead to, 43 reciprocal interdependency, 43

C Canada Goose, 105 Canadian Auto Workers (CAW), 72 Canadian banks, 346b Canadian Charter of Rights and

Freedoms, 65 Canadian Employee Relocation Council

(CERC), 306b Canadian Occupational Projection System

(COPS), 91b capabilities, 16 career development, 305 career management concepts, 188 Certified Management Accountants of

Ontario (CMAO), 400b–401b change management

action research, 234 double-loop learning, 225 emergent change, 238–241 field theory, 232–233 generic model of change, 226–231 group dynamics, 233–234 importance of feedback, 224 increasing pace of change, 222 organizational learning, 241–245 organizations as open systems, 223–224 planned change approach, 237–238 single-loop learning, 224 societal, industrial, and organizational

levels of change, 222–223 strategic HR and change, 245–246 three-step model, 235–237

chaos theory, 239–241 Cisco, 183 client satisfaction

advantages of, 374–375 methods of, 375–376 problems with, 376–377

Colgate-Palmolive Co., 306b

A aboriginal population, 136 academy companies, 184, 185 acquisition growth strategy, 8 action research, 234 adaptive IHRM approach, 291 Amazon effect, 262 apprentices, 170 artificial intelligence, 206, 260–261 assessment centres, 178b asset downsizers, 270 attitudes, 377 attrition, 97 audit, 386

B baby boomers, 167 baby busters, 68 balanced scorecard, 388 bankruptcy, 7–8 behavioural theory, 34–35 benchmarking, 386–388 benefits administration, 200b best-cost provider strategy, 18 “best-of-breed” vendors, 352 best practices

two approaches, 392 universality of, 390

big data artificial intelligence and machine

learning, 206 ethics, 206–207 five pillars, 205 structured data, 204 unstructured data, 204

board of directors, 71 Boudreau, John, 137 broad differentiation

strategy, 18 bullwhip effect, 156 business intelligence, 61, 207 business partner, 43–44

communication skills, 82b communicator, 221b company-wide strategy, 6 compensation, 336–337

differentiation strategy, 41b low-cost-provider strategy, 39b

competency-based approach, 173–174 competitive advantage, 15–17, 16b competitive intelligence, 61 competitive position, 18 concurrent strategy formulation, 43 Conference Board of Canada, 387 conglomerate merger, 317–318 consolidation, 318 contingency perspective, HRM, 32–34 contingency plans, 95 contingent workers, 70 contract negotiation, 359–360 core competencies, 17, 174 corporate HR, 45b corporate social responsibility (CSR), 272 corporate strategy, 6

vs. business strategies, 10 growth, 8 restructuring, 6–8 stability, 8–9

cost–benefit analysis, 384–385 cost control

employee behaviour, 380–381 increasing efficiency, 379–380 reduce labour expenses, 379

Credible activist, 221b critical human capital segments, 137–138 critical incident method, 376 crowdsourcing, 87 culture, 326

management, 377–379

D data security, 213 Delphi technique, 121–123 demand forecasting, 91, 104–106

Note: Page references with b, f, and t notations refer to a box, figure, and table on that page respectively

INDEX

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NEL INDEX 413

firm-based decline, 258 firm-specific human capital, 86 firm-specific knowledge, 171 “flexibility-oriented” human resource

strategy, 258 flexible labour strategies, 298–299 force-field analysis, 232–233 Ford Financial, 188 Ford of Canada, 190–191 forecasting methods, 61, 91–94 forensic reporting, 213 formal training and development, 182 Four Seasons, 292b Fraser Health, 96b Frito-Lay, 399b–400b

G general managerial core competencies, 174b general mobility skills and knowledge, 174b General Motors (GM), 56b generational differences, 68 generic human capital, 86 gig economy, 63b–64b globalization, 64–65 global strategy, 292 Global Wood Group, 73b–75b government programs, influence

of, 141–142 Great Atlantic and Pacific Tea Company

(A&P), 39 group dynamics, 233–234 growth strategy, 8 Guptill, David, 177

H Hayes’ generic model of change, 226f high-potential employees, 175–179 high-potential replacements, 185 home-country nationals (HCNs), 299 home support workers (HSWs), 100 horizontal integration, 320 horizontal merger, 316 HR analytics, 369 HR budgets, 124–125 HR dashboards, 210–211 HR deliverables linked to strategy, 389f HR demand forecasting

Delphi technique, 121–123 forecasting certainty, 105 HR budgets/staffing tables, 124–125 management survey, 117–119

segmentation, 137 segments, 137

employee value proposition (EVP ), 177 employers, 140 employment deal, 138 employment equity–designated group mem-

bership, 89 employment legislation, 289 Enbridge Gas Distribution, 368b Energy Resources Conservation Board

(ERCB), 217 enterprise portals, 201 enterprise resource planning (ERP), 203 envelope, 94 environmental analysis process, 75f environmental influences

demographic factors, 67–68 economic climate, 63–64 external factors, 72 forecasting methods, 61 globalization, 64–65 political and legislative factors, 65 proactive approach, 73 scanning sources, 57–61 social and cultural factors, 69–70 stakeholders, 70–72 technological factors, 65–66

environmental scanning defined, 57 external environment, 57–58 information sources, 58–61 isolating critical from insignificant, 62

executive education, 182 exportive IHRM approach, 291 external candidates, 171b external coaches, 183 external environment, 15

stages, 57–58 external factors, 72 external fit, HR, 47–48 external human capital demand

and supply, 298 external supply, 136

F field theory, 232–233 financial benefits, 320–321 financial impact, 322–324 financial performance, downsizing

phenomenon, 269–274 financial restructuring, 257 financial savings, 349–350

demographics, 67–68 Department of Public Works, 278–280 designated group, 89 detailed, job-specific competencies, 174b differentiation strategy, 40b–42b direct costs, 384 distributive justice, 267 divestiture, 7 domestic strategy, 291 double-loop learning, 225 downsizing phenomenon, 254–255

alternatives to, 259–260 Amazon effect, 262 artificial intelligence and job loss,

260–261 decision and the Sears closure,

258–259 definition, 255–257 Department of Public Works,

278–280 financial performance and, 269–274 inplacement and outplacement issues,

262–266 “New Deal” in employment and the

psychological contract, 274–276 organizations, 257–258 “survivors” of, 266–269

downsizing strategy, 254 Drucker, Peter, 179 dynamic capabilities, 17

E early downsizers, 272 economic climate, 63–64 Edwards Lifesciences, 166, 166b effective employee retention policies, 155 efficiency, 379 e-learning, 66 EMEND Management Consulting,

192–193 emergent change, 238–241 emergent strategy, 4 employee, 71–72

average and envelope of, 95f behaviour, 380–381 differentiation strategy, 40b–41b low-cost-provider strategy, 38b–39b morale, 354–356 movement, 149 movement patterns, 146 potential assessment, 178 role, 186–188

16_index.indd 413 7/31/18 8:49 PM

INDEX NEL414

Mennonite Savings and Credit Union, 240b

mission statements, 12b–13b multiple strategies, 9b–10b needs analysis questions, 215b negotiating service outcomes, 360b nominal group technique, 124b organizational change, 230b–231b organizational downsizing and alcohol

use, 267b

organizational values, 14b organizations with succession

management, 167b outsourcing backlash, 355b Pet Valu, 329b popular HR measures, 394b predicting future of HRM, 60b preparation for outsourcing, 357b publications, 59b ranking HR activities, 347b ratio analysis, 108b reasons for failures of M&As, 323b recommendations for retaining

employees, 144b recruitment options, 300b regression in action, 115b–116b repatriation, 304b–306b replacement planning vs. succession

management, 173b request for proposal for outsourcing,

358b retention of highly skilled

workers, 143b return on investment, 382b–383b sample technology effectiveness items,

214b scenario-based, 61b science of persuasion, 229b–230b skilled services industries, 128b skills, 82b skills gap, 139b small business and HR outsourcing,

349b software, 199b specialty coffee industry, 241b stages of HR technology adoption, 202b strategic partner, 44b strategic planning, 84b strategic vision of, 45b strategy, 35–36 strategy descriptions, 3b TD Bank acquired Canada Trust, 338b

efficiency measures, 380b employee potential, 178b employee quit behaviour, 271b employee retention policies, 155b employee value proposition, 177b employment status and suicide risk,

266b Encana, 338b external candidates, 171b factors distinguishing the intelligence

revolution, 261b fairness and commitment after

downsizing, 268b Fleet Complete, 296b force-field analysis, 233b forecasting models, 93b, 98b forecasts, 156b–157b foreign ownership of Canadian

Companies, 317b Four Seasons, 292b gig economy, 63b–64b goals of mergers and achievement rates,

324b guidelines for effective training, 303b hard objectives, 15b health sector, 96b HR analytics and strategy at Lowes,

209b–210b HR functions that are outsourced, 348b HRM practices, 385b HR role assessment survey, 376b human capital forecasting, 91b impact of offshoring in India, 347b impact, technology on organizations, 66b importance of succession management,

166b important of, 36 internal candidates, 171b internal labour market, 151b international selection and preparation,

301b issues companies face with outsourcing

providers, 361b job requirements vs. task requirements,

87b lagging indicator, 393b limitations of big data, 208b losing a job and social

withdrawal, 275b low-cost-provider strategy, 38b–40b managerial competencies, 174b Markov models, 149b measuring employee attitudes, 378b

HR demand forecasting (Continued ) nominal group technique, 123–124 qualitative forecasting techniques,

117–124 quantitative methods, 106–117 regression analysis, 109–116 scenario planning, 119–121 structural equation modelling, 117 time series models, 108–109 trend/ratio analysis, 106–108

HR forecasting defined, 81 environmental factors, 94–97 firm-specific human capital, 86 generic human capital, 86 human capital stock and flows, 86–87 organizational factors, 94–97 process, 90–94 strategic forecasting, 88–90 strategic importance of, 81–86 time horizons, 94–95

HR gaps, 83 HRM. See human resource management

(HRM) HR metrics, 207–210

dashboards, 210–211 key performance indicators, 211–212

HR offshoring (HRO), 346 HR planning

academy companies, 185b acquisition, 327b–328b added value, 384b alternatives to employee cutbacks, 260b apps, 200b associations, 60b attracting older workers, 141b benefits of external coaches, 183b big data and HR segmentation, 207b Bosley’s Pet Food Plus, 329b Canadian companies differentiate, 47b Canadian Employee Relocation

Council, 306b CIBC, 350b competitive advantage, 16b complex forecasting models, 92b contingency plan, 331 criteria for evaluating potential

outsourcers, 359b cultural due diligence checklist, 330b Delphi technique, 122b differentiation strategy, 40b–42b due diligence, 331–332

16_index.indd 414 7/31/18 8:49 PM

NEL INDEX 415

specialty products, 203 strategic workforce planning software,

217 web-based HR, 200–201 workforce management and scheduling,

212 inplacement, 262 intangible assets, 16 integrative IHRM approach, 292 intended strategy, 4 interactional justice, 267 internal candidates, 171b internal fit, HR, 48 internal mentors, 183 internal supply, 136 international assignments

expatriate assignment, 295 frequent flyers, 294 international commuters, 294 permanent transfer, 295 purposes of, 293–294 short-term assignment, 294

international growth strategy, 8 international human capital demand

and supply, 295–297 environment, 298 external human capital demand

and supply, 298 flexible labour strategies, 298–299 labour market data, 297–298

issues priority matrix, 72t

J job analysis, 141 job-based approach, 173 “job for life” approach, 277 job insecurity, 267 job loss, 260–261 job openings by skill level, 152b job procedures, 19 job requirements vs. task requirements, 87b job rotations, 180–181 job sharing, 97 job vacancy rate, 152b Johnson and Johnson, 30

K key performance indicators (KPIs), 211–212 knowledge, skills, abilities, and other

characteristics (KSAOs), 82 knowledge, skills, and abilities (KSAs), 35

linking HR processes to strategy, 37–44 organizational performance, 381–383 policies and practices, 384–396 rationale, 371–373 resistance, 370–371 strategic contributions, 31–32 strategic for, 2–4 strategic HR planning, 35–36 strategic partnering, 44 successful measurement, 393–396 workforce analytics, 368–369

human resources (HR) analytics, 396 demand, 85 measurement alternatives, 391t old rules vs. new rules, 397t practitioners, 394 supply, 86

human resources information system (HRIS), 202, 370

human resources management systems (HRMS), 178b

Human Resources Professionals Association, 58

hurdle rate, 19

I IBM, 236 implicit contracts, 275 Income Tax Act, 68 incremental growth strategy, 8 indirect costs, 385 Individual Development Plan (IDP), 191 informal feedback, 375 information sources

conferences and seminars, 58 professional associations, 58 professional consultants, 60–61 publications, 58

information technology (IT) big data (see big data) data security, 213 enterprise portals, 201 enterprise resource planning, 203 forensic reporting, 213 HRM, 199–200 HR metrics and workforce analytics,

207–212 human resources information system,

202 needs analysis, 214–215 self-service, 201

time-series forecasting, 109b traditional vs. emerging career

management concepts, 187b transition team, 333–334 trigger events, 5b turnaround, 7b unfreezing at IBM, 236b UPS, 290b utility analysis, 386b words used to describe downsizing, 256b workforce analytics, 209b workforce planning, 37b workforce strategies, 69b

HR retention programs, 142–143 HR scorecard, 388–389 HR strategy differentiation, 46–48 HR supply

influence of government programs, 141–142

labour pools, 140–141 retention programs, 142–143 role of employers in influencing supply,

140 HR surplus, 83 Hudson’s Bay Company (HBC), 2b human capital

analyses, 88–90 firm-specific, 86 flow, 87 generic, 86 linear programming and simulation,

149–150 Markov models, 145–149 movement analysis, 150–152 segmenting the internal supply of,

137–139 skills and management inventories,

144–145 stock, 86 theory, 33–34 vacancy model, 152–154

human resource management (HRM) behavioural theory, 34–35 client satisfaction, 373–377 compliance, 373 contingency perspective, 32–34 contribution, 381 cost control, 379–381 culture management, 377–379 goals, 36–37 HR analytics, 396 HR strategy differentiation, 46–48

16_index.indd 415 7/31/18 8:49 PM

INDEX NEL416

organizational restructuring, 257 organizational size, 145 organization capability consultants, 45b organizations

measuring employee attitudes, 377, 378f as open systems, 223–224 overview of, 21f strategic planning benefits, 20

outplacement, 262 outsourcing

advanced technology, 352 benefits to Canada, 353 Canadian banks, 346b contract negotiation, 359–360 definition, 346 employee morale, 354–356 financial savings, 349–350 HR functions, 346–349 improved service, 352 monitoring the arrangement, 360–361 organizational politics, 353 policy options to limit, 362 projected benefits vs. actual benefits,

354 reduced value, 356 security risks, 356 service risks, 354 specialized expertise, 352–353 strategic focus, 351 Texas Instruments, 363 vendor selection, 357–359

P paradox navigator, 221b parent-country nationals (PCNs), 299 people development framework, 190–191 people equation, 190 people search applications, 200b Pep Boys, 199b performance appraisals, 178b, 337 performance evaluation

differentiation strategy, 41b–42b low-cost-provider strategy, 40b

personal mastery, 242–243 personnel development committees (PDCs),

190 personnel management, 31. See also human

resource management (HRM) planned change approach, 237–238 planned model of change

action research, 234 field theory, 232–233

Molson and Coors, 340 performance appraisal, 337 selection, 335–336 strategic benefits, 318–320 success rate of mergers, 322 training and development, 337

mergers growth strategy, 8 Millennials, 68 mission statement, 11, 12b Molson Coors and acquisitions, 40 movement analysis, 150–152 moving stage, 237 multidomestic strategy, 291 multinational strategy, 291–292 multiorganizational career, 274 multiple strategy, 9b–10b multiplier effect, 148

N National Steel, 382b–383b needs analysis, 214–215 net HR requirements, 97 neurodiversity, 141 “New Deal” in employment and the

psychological contract, 274–276 “Niche-oriented” human resource

strategy, 258 nominal group technique (NGT), 123–124 North American Free Trade Agreement

(NAFTA), 64

O Ontario Hydro, 169 Ontario Power Generation (OPG), 131b on-the-job learning, 181–182 open systems, 223–224 operating synergy, 318 operational planning, 19 organizational change. See Change

management organizational learning, 241–242

mental models, 243 personal mastery, 242–243 shared vision, 243–244 systems thinking, 244–245 team learning, 244

organizational performance financial measures, 381–382 profits/return on investments, 382–383

organizational policy, 154 organizational politics, 353

L labour market, 67 labour market data, 297–298 labour pools, 140–141 labour relations, 307–308, 337–338

differentiation strategy, 42b issues, 276 low-cost-provider strategy, 40b

lagging indicator, 393b Leadership Development Employee Profile

(LDEP), 191 leadership training, 182 legislative factors, 65 Lewin, Kurt, 231 linear programming, 149–150 liquidation, 7 Loblaw Companies LTD., 23–26 logical incrementalism, 4 low-cost provider strategy, 18, 38b–40b Lowes, 209b–210b

M machine learning, 206 macro business forecasting process, 84 management development methods, 180–181 management inventories, 145 management needs, 321 management survey, 117–119 managerial competencies, 174 managerial perceptions, effectiveness, 383 market niche strategy, 18 Markov chains, 148 Markov models, 145–149 mass customization in HR, 143 McDonald’s, 7b, 38b Mennonite Savings and Credit Union, 240b mental models, 243 mentors, 182 merger methods, 321–322 mergers and acquisitions (M&As)

compensation, 336–337 cultural issues, 325–330 definitions, 316–318 evaluation of success, 338 financial benefits, 320–321 financial impact, 322–324 HR planning, 331–334 impact on human resources, 324–325 labour relations, 337–338 management needs, 321 merger methods, 321–322

16_index.indd 416 7/31/18 8:49 PM

NEL 417INDEX

single-loop learning, 224 skills gap, 139 skills inventory, 144–145 skills strategy, 43 SK Telecom, 288b social and cultural factors, 69–70 social networks, 229 Society for Human Resources

Management, 394 Solutions Inc., 45b specialist workers, 88–89 Specialty coffee industry, 241b Specialty products, 203 stability strategy, 8–9 staffing table, 124–125 stakeholders, 70–72, 90 Starbucks, 84b strategic benefits, 318–320 strategic downsizing, 273 strategic forecasting, 88–90 strategic HRM, 30–31 strategic international HR planning, 290 strategic international human resources

management (HRM) definition, 291 domestic stage and strategy, 291 employment legislation, 289 global stage, 292–293 international assignments, 293–295 international human capital demand

and supply, 295–299 labour relations, 307–308 multidomestic stage and strategy, 291 multinational stage and strategy,

291–292 post-assignment activities, 304–306 pre-assignment training, 302–303 recruitment, 299–301 security, 289–290 selection, 301–302 size, geographical distribution,

and level of internationalization, 290, 290b

workforce diversity, 289 strategic management

benefits of, 20–21 business strategies, 10 corporate strategies, 6–10 overview, 2–3 strategic planning process, 11–21 strategy, 3–6

strategic partner, 44b

regression analysis definition, 109 nonlinear relationship, 114f predictor variables, 113 regression limitations, 114 scatterplot, 110f shared variability, 112f–113f three-dimensional regression

plane, 111f trend line, 110f

relational database, 203 repatriation, 304–305 replacement charts, 175 replacement planning, 168 reputation for corporate social performance

(RCSP), 272 request for proposal (RFP), 357 Research, Measurement and Evaluation

of Human Resources, 390 resource-based view, 31–32 resource constraint and scarcity, 85–86 restructuring strategy, 6–8 retrenchment strategy, 6 return on equity (ROE), 382 return on investment (ROI), 382 revectoring, 269 right to privacy, 69 Rogers Communications, 316 role/specific competencies, 174 Route Sales Representative (RSR), 399

S Sapient Corporation, 85b Sarbanes-Oxley Act, 88, 371 scenario planning, 119–121, 120f scenarios, 95 Sears, 258–259 security, 289–290 security risks, 356 selection

differentiation strategy, 41b low-cost-provider strategy, 39b

self-service, 201 senior executives, 71 senior management, 71 serial downsizers, 271 service risks, 354 Services Inc., 45b shared vision, 243–244 shareholders, 396 sharing economy, 104b simulation analysis, 127–128

group dynamics, 233–234 three-step model, 235–237

political factors, 65 Pool, Kathleen, 278 Porter, Michael, 18 portfolio restructuring, 257 positive feedback, 224 post-assignment activities

career development, 305 repatriation, 304–305

pre-assignment training, 302–303 prediction, 94 proactive approach, 73 proactive organizations, 259 procedural justice, 267 process management skills, 82b professional associations, 58 professional consultants, 60–61 professional workers, 88–89 program, 19 projection, 94 promotables, 179 promotion, 180 psychological contract, 274–276 psychological safety, 235–236 publications, 58 pure employment, 270

Q qualitative forecasting techniques

Delphi technique, 121–123 management survey, 117–119 nominal group technique, 123–124 vs. quantitative forecasting, 126, 126b scenario planning, 119–121

quantitative forecasting method ratio analysis, 106–108 regression analysis, 109–114 structural equation modelling, 117 time series models, 108–109 trend analysis, 106–108

quantitative skills, 82b

R rating system, 171–172 ratio analysis, 106–108 readiness risk, 188 realized strategy, 4 recruitment, 177, 299–301 recruits, 90 refreezing, 237

16_index.indd 417 7/31/18 8:49 PM

INDEX NEL418

training differentiation strategy, 41b low-cost-provider strategy, 39b–40b

transitional probabilities, 147 transition risk, 188 trend analysis, 106–108 turnaround strategy, 6, 7b

U unfreezing, 235 unions, 72 unique/distinctive competencies, 174 United Food and Commercial Workers

(UFCW), 39 UPS, 290b utility analysis, 385–386

V vacancy, renewal, or sequencing model,

152–154 vacancy risk, 188 values

proposition, 18 strategic planning process, 12

vertical integration, 320 vertical merger, 317 vision statement, 12

W Walmart, 88 web-based HR, 200–201 Whale, Elliot, 179 workforce analytics, 368–369 workforce diversity, 67–68, 289 workforce management and

scheduling, 212 workforce planning, 35f, 37b, 91b workforce reduction, 255 workforce strategies, 69b work–life balance, 69–70 work redesign, 256

evolution of, 168 high-potential employees, 175–179 job-based approach, 173 monitoring, 185–188 rating system, 171–172 talent pools, 169–171 time horizon, 169

supervisors, 71 supply forecasting, 91 survival anxiety, 235 survivor reactions, 268–269 survivors (of downsizing), 254 SWOT analysis, 17, 24 Syncrude Canada Ltd., 178 systematic change, 256 systems thinker, 221b systems thinking, 244–245

T takeover, 318 talent management, 188, 200b

culture, 176 talent pools, 169–171 talent segmentation, 170 talent war, 32 tangible assets, 15 “T” chart, 191 team learning, 244 technical workers, 88–89 technological factors, 65–66 technology acceptance, 214 Temporary Foreign Workers

Program, 142 temporary replacements, 15 Texas Instruments (TI) Canada, 363 third-country nationals (TCNs), 299 three-step model, 235–237 time horizon, 169

HR forecasting, 94–95 time-series forecasting

models, 108–109

strategic planning process, 11f benefits of, 20–21 competitive advantage, 15–17 competitive position, 18 evaluating performance, 19–20 external environment, 15 implementation strategy, 19 mission statement, 11 objectives, 14–15 values, 12 vision statement, 12

strategic positioner, 221b strategic replacement, 175–176 strategic skills, 82b strategic workforce planning (SWP)

software, 217 strategy, 3–6

best-cost provider, 18 broad differentiation, 18 business, 10 corporate, 6–9 descriptions of, 3b HRM, 31–32 HR planning, 35–36 implementation, 19 linking HR processes, 37–44 low-cost provider, 18 market niche, 18 process, 5f trigger events, 5b

structural equation modelling (SEM), 116f, 117

substitution and other gap strategies, 154–156 bullwhip effect, 156

succession management, 166–167 aligning plans with strategy, 172 broader focus, 168–169 competency-based approach, 173–174 developmental opportunities and

experiences, 179–185 Edwards Lifesciences, 166b

16_index.indd 418 7/31/18 8:49 PM

Cover
CONTENTS��
About the Series��
About the Authors��
Preface��
Acknowledgments��
Chapter 1: Strategic Management��

Chapter Learning Outcomes��
Strategic Management at The Bay��
A Need for Strategic HRM��

Strategy��

Strategic Types��

Corporate Strategies��
Business Strategies��

The Strategic Planning Process��

1. Establish the Mission, Vision, and Values
2. Develop Objectives
3. Analyze the External Environment
4. Identify the Competitive Advantage
5. Determine the Competitive Position
6. Implement the Strategy
7. Evaluate the Performance
Benefits of Strategy Formulation��

Summary��

Key Terms��
Discussion Questions��
Exercises��
Case Study: Loblaw Companies Ltd.��
References��

Chapter 2: Aligning HR with Strategy��

Chapter Learning Outcomes��
HR Structure at Johnson and Johnson��
Strategic HRM��
Theories of the Strategic Management of Human Resources��

HRM Making Strategic Contributions��
The Contingency Perspective��
Behavioural Theory��
Strategic HR Planning��
The Importance of Strategic HR Planning��
Improved Goal Attainment��
Linking HR Processes to Strategy��
Corporate Strategy Leads to HR Strategy��
HR Competencies Lead to Business Strategy��
Reciprocal Interdependency Between HR Strategy and Business Strategy��
HR Becomes a Business Partner��

Strategic Partnering��
Becoming More Strategic��
HR Strategy Differentiation��

Characteristics of an Effective HRM Strategy��
Focus on Results��

Summary��
Key Terms��
Discussion Questions��
Exercises��
Case Study: Linking HR Practices to Performance��
References��

Chapter: 3 Environmental Influences on HRM��

Chapter Learning Outcomes��
Environmental Scanning at GM��
Introduction��
Environmental Scanning Sources and Methods��

Sources of Information��

Methods of Forecasting��

Competitive Intelligence��

Challenges in Environmental Scanning��

Isolating the Critical from the Insignificant��

Environmental Factors��

Economic Climate��
Globalization��
Political and Legislative Factors��
Technological Factors��
Demographic Factors��
Social and Cultural Factors��
Stakeholders��
Responding to External Factors��
A Proactive Approach��

Summary��
Key Terms��
Discussion Questions��
Exercises: Scenario Planning��
Case Study: Work–Life Family Balance��
References��

Chapter 4: The HR Forecasting Process��

Chapter Learning Outcomes��
Workforce Planning in Canada��
What Is HR Forecasting?��
The Strategic Importance of HR Forecasting��

Increasing Organizational Flexibility��
Ensuring a Close Linkage to the Macro Business Forecasting Process��
Ensuring That Organizational Requirements Take Precedence Over Issues of Resource Constraint and Scarcity

Chapter 5: Determining HR Demand��

Chapter Learning Outcomes��
Increase in Uncertainty Around the Demand for Labour��

Increase in Uncertainty around the Deman for Labour in Canada

Forecasting Demand��

Certainty in Forecasting��
Volume and Complexity of Available Data��
Quantitative Methods��
Trend/Ratio Analysis��
Time Series Models��
Regression Analysis��
Structural Equation Modelling��

Qualitative Forecasting Techniques��

Management Survey��
Scenario Planning��
Delphi Technique��
Nominal Group Technique��

HR Budgets/Staffing Tables��
Combining Quantitative and Qualitative Methods��

Simulation��

Summary��
Key Terms��
Discussion Questions��
Exercise: Scenario Planning��
Case Study: Ontario Power Generation��
References��

Chapter 6: Ascertaining HR Supply��

Chapter Learning Outcomes��
Aboriginal People: A Growing Labour Source��
Introduction��
Segmenting the Internal Supply of Human Capital��
HR Supply Programs��

The Role of Employers in Influencing Supply��
Other Labour Pools��
Influence of Government Programs��
HR Retention Programs��

Methods for Modelling the Supply of Human Capital��

Skills and Management Inventories��
Markov Models��
Linear Programming and Simulation��
Movement Analysis��
Vacancy Model��

Substitution and Other Gap Strategies��

Managing the Bullwhip Effect��

Summary��
Key Terms��
Discussion Questions��
Exercise��
Case Study: HR Planning at M&K��
References��

Chapter 7: Succession Management��

Chapter Learning Outcomes��
Succession Management at Edwards Lifesciences��
Importance of Succession Management��

Evolution of Succession Management��
Broader Focus��
Time Horizon��
Talent Pools��
Rating System��
Succession Management Process��

Summary��
Key Terms��
Discussion Questions��
Exercises��
Case Study 1: The People Development Framework at Ford of Canada��
Case Study 2: Executive Succession Management Program at Emend Management Consulting
References��

Chapter 8: Information Technology for HR Planning��

Chapter Learning Outcomes��
Software for HR Planning��
IT and HRM��
New Service Delivery Models��

Web-based HR��
Enterprise Portals��
Self-Service��

Different Solutions for Different Needs��

HRIS��
Specialty Products��
Enterprise Solutions��
Big Data��

Types of Big Data��
The Five Pillars of Big Data��
Artificial Intelligence and Machine Learning��
Ethics and Big Data��

HR Metrics and Workforce Analytics��

Maximizing the Benefits of HR Metrics��

Other Aspects of IT for HR Planning��

Workforce Management and Scheduling 212��
Forensic Reporting��
Ensuring Data Security��

Evaluating HR Technology��

Conduct a Needs Analysis��

Summary��
Key Terms��
Discussion Questions��
Exercises��
Case Study: Sustaining Talent with Strategic Workfoce Planning Software at the Eenergy Resources Conservation Board

Chapter 9: Change Management��

Chapter Learning Outcomes��
Can HR Lead Change?��
Why Is Organizational Change Important?��

The Increasing Pace of Change��

Societal, Industrial, and Organizational Levels of Change��
Models of Organizational Change��

Organizations as Open Systems��
The Importance of Feedback��
Single-Loop Learning��
Double-Loop Learning��

The Generic Model of Change��

Recognizing the Need for Change and Starting the Process��
Diagnosing What Needs to Be Changed��
Planning and Preparing for Change��
Implementing the Change��
Sustaining the Change��

The Planned Model of Change��

Field Theory��
Group Dynamics��
Action Research��
Three-Step Model��

Development of the Planned Change Approach��
Emergent Change��

Chaos Theory and Emergent Change��

Organizational Learning��
Strategic HR and Change��
Summary��
Key Terms��
Discussion Questions��
Exercises��
Case Study: Change at Tiger Boots��
References��

Chapter 10: Downsizing and Restructuring��

Chapter Learning Outcomes��
Downsizing: A Thing of the Past?��
The Downsizing Phenomenon��

Defining Downsizing and Restructuring��
Why Do Organizations Downsize?��
The Downsizing Decision and the Sears Closure��
Alternatives to Downsizing��

The Future of Work��

Artificial Intelligence and Job Loss��
The Amazon Effect��

Inplacement and Outplacement Issues��

Some Ethical Considerations��
Planning for Downsizing��
Adjusting to Job Loss��

The “Survivors” of Downsizing��

Perceptions of Justice��
Survivor Reactions��
Impact on the “Downsizers”��

Financial Performance and Downsizing��

Consequences of Downsizing��
Downsizing Strategies��
Strategic Downsizing��
Effective and Ineffective Approaches��

The “New Deal” in Employment and the Psychological Contract��

Labour Relations Issues��

Summary��
Key Terms��
Discussion Questions��
Exercises��
Case Study: A Downsizing Decision at the Department of Public Works

Chapter 11: Strategic International HRM��

Chapter Learning Outcomes��
The Would-Be Pioneer��
Introduction��
Key Challenges Influencing HR Practices and Processes Within an International Context

Chapter 12: Mergers and Acquisitions��

Chapter Learning Outcomes��
Big Is Beautiful��
Mergers and Acquisitions��
Definitions��
The Urge to Merge��

Strategic Benefits��
Financial Benefits��
Management Needs��
Merger Methods��
The Success Rate of Mergers��
Financial Impact��
Impact on Human Resources��

Cultural Issues in Mergers��
HR Issues in M&As��

HR Planning��
Selection��
Compensation��
Performance Appraisal��
Training and Development��
Labour Relations��

Evaluation of Success��
Summary��
Key Terms��
Discussion Questions��
Exercise��
Case Study: Molson Coors and Acquisitions��
References��

Chapter 13: Outsourcing��

Chapter Learning Outcomes��
Outsourcing at Canadian Banks��
Outsourcing��

Outsourcing HR Functions��

The Rationale for Outsourcing��

Financial Savings��
Strategic Focus��
Advanced Technology��
Improved Service��
Specialized Expertise��
Organizational Politics��
Benefits to Canada��

Risks and Limitations of Outsourcing��

Projected Benefits versus Actual Benefits��
Service Risks��
Employee Morale��
Security Risks��
Reduced Value��

Management of Outsourcing��

Selecting the Vendor��
Negotiating the Contract��
Monitoring the Arrangement��
Policy Options to Limit Outsourcing��

Summary��
Key Terms��
Discussion Questions��
Exercise��
Case Study: Outsourcing at Texas Instruments Canada��
References��

Chapter 14: HR Assessment and Analytics��

Chapter Learning Outcomes��
Keeping Score with the Scorecard��
Workforce Analytics��
The Importance of Evaluating HRM��

Resistance��
Rationale��

The 5C Model of HRM Impact��

Compliance��
Client Satisfaction��
Culture Management��
Cost Control��
Contribution��

How HR Contributes to Organizational Performance��

Financial Measures��
Measures of Managerial Perceptions of Effectiveness��

Approaches to Measuring HRM Practices��

Cost–Benefit Analysis��
Utility Analysis��
Benchmarking��
The HR Scorecard��
Measuring the Worth of Employees��
Universality of Best Practices��
Separation of Cause and Effect��
Successful Measurement��
Reporting to Boards of Directors and Shareholders��

The Future of HR Analytics��
Summary��
Key Terms��
Web Links��
Discussion Questions��
Exercise��
Case Study 1: Talent Management and Workforce Analytics at Frito-Lay��
Case Study 2: Measuring Culture to Support Growth at CMA��
References��

Glossary��
Index��
Blank Page