Transforming Talent Management Through Segmentation

While one might expect organizations to seek out innovative approaches to talent management using the type of nuanced, analytics-driven decision making common in market or capital planning, many companies still take a "blunt instrument approach" to talent management, thus making it difficult to answer questions about where, how much, when and how to invest for optimal return.

Monday, June 3, 2013
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Global economic volatility, along with rapid shifts in talent markets and workforce demographics, are making the task of managing talent ever more complex. At the same time, HR executives are under increasing pressure to optimize their investments in their workforces in order to ensure the ongoing competitiveness of their organizations during trying economic times.  Recent studies highlight the magnitude of this challenge. According to the 2012-2013 Towers Watson Global Talent Management and Rewards Study, more than 60% of survey respondents report significant difficulty in attracting and retaining critical-skill and high-potential employees. Another study, Global Talent 2021 conducted by Oxford Economics and Towers Watson, anticipates that talent shortages in key technical and managerial areas in developed countries including the U.S. will increase dramatically over the next 10 years. Not surprisingly, companies are paying a price for their talent management shortfalls. In a July 2012 Economist Intelligence Unit survey, 43% of senior executives partially attribute their firms' inability to meet key financial targets to ineffective talent management, and two in five state that ineffective talent management has also reduced their company's ability to innovate.

Given the high stakes, one might expect organizations to seek out innovative approaches to talent management using the type of nuanced, analytics-driven decision making common in market or capital planning. Instead, many companies still take a "blunt instrument approach" to talent management, making it difficult to answer questions about where, how much, when and how to invest for optimal return. Until fairly recently, they haven't had the tools or data to understand precisely how various employee groups and roles contribute to business success or how differing employee needs, attitudes and preferences shape the way workers perform their jobs and engage with their organization. This handicap stems from the fact that HR professionals have spent the past 20 years focused largely on the efficient delivery of services and not on approaches to generating greater value from different talent segments, in much the same way marketing does with its various customer segments.

Now, several factors are combining to change this picture, making it possible for organizations to embed workforce segmentation into their core human capital practices and programs. First, increased globalization has put a much finer point on the very real differences that emerge across the workforce. At the same time technology is making it possible to move work seamlessly across groups in far-flung locations. And perhaps most important, new more sophisticated analytic tools and an abundance of workforce data is readily available to those seeking to understand their current and prospective employees, and the value they can deliver to the organization from a more granular perspective.

Put simply, companies are realizing that to attract and retain a diverse global talent pool, and to achieve maximum value from that talent pool across geographies and varying business models, they need to look at the distinct segments that make up their workforce and determine how those segments deliver value to the organization and what those segments value from the organization in return.

The Value Exchange

Think of workforce segmentation as the foundation of holistic talent management, part and parcel of the way an organization recruits, retains, engages, manages, develops and rewards its people.  In this regard, it's akin to how businesses segment their customers in order to craft a mutually beneficial value proposition designed to enhance their sales and customer relationship management.  For HR, the employee is the "customer," and savvy employers realize their relationship with that customer is strengthened by their ability to understand the value that customer's role and skills provide to the organization, as well his or her personal and social characteristics. Embedding segmentation into HR planning and operations helps organizations develop insights about different talent segments that optimize the value exchange between the organization and its employees.

In defining a value exchange, it is important to address several key questions. First, what are the unique demands the business model places on specific roles (i.e., where does great talent really make a difference versus good enough sufficing) and what is the nature of the relationship between performance in a job and value to the organization? Second, what are the investments (HR or otherwise) that will ensure optimal performance for employees in these various roles? Lastly, how does the value proposition for our workforce match up with employee needs relative to their lifestyles and life choices? It is important to distinguish between pivotal roles, which are critical to executing a particular strategy and business model, and other roles which while essential to operating the business may not be pivotal to the strategy. For example, an R&D scientist with specialized knowledge and accountability for new products in a particular market segment plays a pivotal role in executing the strategy of a niche biotech company while a business analyst who for the most part follows a standard set of operating procedures and only indirectly affects value creation does not. By identifying and focusing on the truly pivotal talent segments--i.e., those that deliver the most business value to the organization - and understanding the unique differences across the workforce, organizations can truly optimize the value exchange.

While more companies are recognizing the importance of developing the right value exchange with different talent segments, their level of sophistication in the area of segmentation varies widely. Some companies still rely on traditional segmentation based on demographics and performance assessments while others are incorporating information about life stages and talent potential into their approach. Still others, further along on the segmentation continuum, use microsegmentation, an advanced form of segmentation that integrates a range of dimensions, including roles, preferences, lifestyles and psychographics. By focusing on these dimensions   companies can develop a deeper and more granular understanding of different employee segments. The resulting insights allow organizations to more efficiently and effectively elicit desired behaviors from different segments and to develop an improved value exchange. For example, keenly aware that highly skilled software engineers value an open, informal workplace, and that spontaneous in-person interactions are critical to innovation, Google has created a highly unstructured work environment that encourages an ongoing exchange of ideas and collaborative activities designed to speed innovation. The connection between strategy and role, and the investments needed to optimize the performance of talent in that role is clear and unambiguous in this example.

Generating Greater Value

One of the key benefits of segmentation is the ability to identify pivotal talent segments and to develop insights about these segments that enable companies to generate greater financial or operational value.  Consider the case of a large airline that had been contemplating providing cash bonuses to its pilots in an effort to increase their engagement and performance while holding the line on fixed wage costs. Before proceeding with this plan, the company decided to analyze the pilot's role more precisely and better understand what the "employment deal" or value exchange should look like - not only for pilots but for other talent pools (i.e., would cash bonuses  provide the best return on investment for the organization versus a better work schedule).

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First, the company studied how various roles contributed to its business success and the differences that existed among various workgroups (see sidebar for an illustration of this analysis of performance and value). It then asked how the investment should vary by role.  In the past, the company had given all employees a variation of the same type of employment deal; i.e., one that rewarded the acquisition of proficiency over the course of a career. Its initial goal of providing bonuses to pilots reflected the company's desire to shift the culture to being more performance oriented.

But, as a result of its segmentation work, the company unearthed a couple of significant insights. Firstly, given the relationship between their performance and value to the organization, cash based incentives are not the optimum investment for pilots as motivating them to achieve higher levels of performance did not yield a higher return beyond a certain point. Instead, an investment in changing the work schedule would go a long way to securing their engagement and ensuring performance was managed to a target level. Secondly, it discovered that there were two categories of roles within the organization; proficiency-based roles (e.g., pilots and mechanics) where the emphasis needed to be on providing a stable work environment given the relatively long time to productivity so the talent in those roles could continue to acquire the skills needed to perform their jobs and progress from one level to another, and performance-based roles, which called for a more transactional employment deal (e.g., flight attendants and customer service representatives) where the emphasis needed to be on continually improving individual performance with a deal that varied primarily based on individual performance. 

In fact, the data showed that productivity in these positions peaked after five years and performance was highly variable as it depended on individual capability. The airline derived value from these jobs in the form of an excellent customer experience, a key source of competitive advantage.  But the company was losing value by rewarding tenure after productivity had reached its peak and job performance had declined. These insights prompted the airline to develop an alternative, transactional-type deal for employees in these jobs while maintaining the traditional proficiency-based deal for its pilots and mechanics. This helped the airline achieve a step-change in its cost structure while greatly enhancing the return on its investment through a much improved customer experience.

A Way of Life

How can an organization begin to embed workforce segmentation into its core processes? First, start small.  Begin with a pilot effort or analysis in a single business unit or geography where talent issues loom larger.  Second, approach the segmentation work from a cross-functional perspective with HR as an enabler (not a driver).  This will ensure ongoing support from leaders. Next, develop a robust business case for the segmentation process with a clear sense of what the ROI will be. This will help ease any traditional objections about the complexity of this type of project or the effort required to undertake the analysis.  Lastly, take the time to understand how segmentation will affect the company's value proposition.  Organizations should specify which elements of the value proposition will be common to all employees and which will differ by employee segments. The balance between the two types of elements can be elusive.

Workforce segmentation represents the next frontier in business planning. Organizations that learn to integrate segmentation insights into their global talent management strategies will enjoy a considerable payoff in the form of improved employee attraction, engagement and retention. And perhaps most importantly, they will benefit from a greatly optimized investment in the workforce.

Ravin Jesuthasan is managing director and global head of talent management in the Chicago office of Towers Watson.

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