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Dear Workforce How Do I Quantitatively Measure the Size of Our Workforce

Dear Head-Counter:


Senior managers and CFOs are notorious for refusing new head count. The primary reason behind their resistance is that they often see employees as an expense rather than an asset. The fewer you have, the more money you save.


It’s possible to do a quantitative analysis to demonstrate to a cynical CFO whether you have “too many” or “too few” employees. I call that process determining “head-count fat.” The process can be used for either justifying new positions or demonstrating the need for layoffs.


Determining whether you need more positions is based on a series of ratios or relationships. The process assumes that there is a relatively fixed ratio between the number of employees needed and certain business metrics. By looking at historical patterns within the firm, you can generally determine a reasonable range for these ratios.


For example, some firms start with a simple ratio known as revenue per employee to determine the number of employees they need. If you have 10 employees and you generate $500,000 in revenue, then the firm’s standard revenue-to-employee ratio is one employee for every $50,000 in revenue. Using this formula, you can justify an added position every time that corporate revenues (or revenue forecasts) go up by $50,000.


There are, however, other more complex internal ratios than revenue per employee that can be used to determine whether you have too many or too few employees. Some of these other ratios include:


  • Employees to managers


  • Employees to new customer orders or backlogged orders


  • Employees to inventory levels


  • Employees to number of customers


  • Regular employees to overhead employees (for adding overhead head count)


  • Labor costs to all production costs


  • Employees to the percent utilization of production capacity


Beyond these internal ratios, some external factors can also indicate the need for additional hiring. For example, as the economy grows, many firms begin to hire so that the newly hired employees will be well trained by the time the increased economic growth eventually leads to increased sales. Some other external factors that often cause companies to increase head count include:


  • An increase in consumer spending


  • A decrease in the unemployment rate


  • An increase in consumer disposable income


  • Increased purchases of durable goods


  • Increased housing purchases


  • Lower interest rates


Whichever ratio you select, work with your CFO’s office to ensure first that they buy into the concept of a fixed ratio, and second that the calculations for that ratio are credible and reliable.


If the ratio concept doesn’t work, the only other viable approach is to shift the burden to influential business-unit managers. They often have more political pull than human resources and can successfully argue that since they were budgeted the money, they ought to be allowed to spend it.


Incidentally, across-the-board hiring freezes are generally silly because they hamper the business units that need to grow rapidly, even during tough economic times. A freeze that focuses exclusively on overhead and no-growth/low-profit business-unit hiring makes more sense.


SOURCE: John Sullivan, head and professor of the Human Resource Management College of Business at San Francisco State University, November 3, 2003.


LEARN MORE: Did You Get the Employee You Wanted?


The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.


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MBAs Don’t View Business as Very Clean

MBA students and graduates apparently don’t think too highly of businesspeople–at least when it comes to ethics.


The Committee of 200–a group representing women in business–commissioned the Center for Women’s Business Research to conduct the study of MBA students and MBA graduates who had received their degrees between five and ten years ago. The committee surveyed both men and women. Only 39 percent of student respondents say that businesses “are honest and ethical.” On top of that, only 35 percent said that businesses “care about employees.”


Recent grads had similar opinions. Thirty-six percent say that businesses are honest and ethical and 25 percent say that businesses care about employees.


Women surveyed generally had more negative impressions of business ethics than men.


The survey also found that the Internet is the most popular source of advice for both women and men in business school or early in their careers. They rely on it more than they rely on spouses/partners, friends, colleagues and associations.

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Making It Harder to Leave PeopleSoft

For more than a year, software maker PeopleSoft Inc. has weathered one of the toughest challenges of employee retention: rival Oracle Corp.’s $7.7 billion hostile takeover bid, which threatens to wipe out thousands of jobs.



    But PeopleSoft is soldiering on. The Pleasanton, California, company has intensified efforts to keep its 11,500 employees from abandoning the ranks, including boosting severance packages for executives and rank-and-file employees as well as holding seminars on retention for supervisors. And, in a move that some analysts have speculated was taken in part to keep employees from jumping ship, it also brought back founder Dave Duffield. He replaced Craig Conway as the company’s chief executive after Conway was fired last month.


    The moves come at a critical time in the company’s 16-month battle against Oracle. For most of the year, PeopleSoft had the edge. But a federal judge unexpectedly handed a crucial victory to Oracle in September. The ruling turned the tide in Oracle’s favor, increasing its chances of succeeding. And it meant that PeopleSoft was more vulnerable than ever to employee flight.


    Many employees have heralded Duffield’s recent return as a dramatic move to raise morale. Duffield has said that one of his goals is “reinvigorating the employee community.”


    Conway waged a vigorous defense against Oracle’s hostile takeover bid and had returned the company to profitability. But he never managed to win the same level of loyalty as Duffield. Conway lent the company a more conservative, suit-and-tie respectability; the unconventional, Hawaiian-shirt-clad Duffield drew widespread employee devotion during his 12-year tenure, even inspiring a company rock band named the Raving Daves. PeopleSoft director Steve Golby also said that in recent months PeopleSoft’s top executives had begun losing confidence in Conway’s leadership, pointing to his style of “micro-managing the business and people in it.”


    “It’s great to be back,” Duffield said in an e-mail to employees on the first day of his homecoming. “For those of you who don’t know me, you can expect to see me in the halls, on the road, in the cafeterias, looking for feedback and the opportunity to meet you.”


Avoiding morale problems
    Besides Duffield’s appointment, PeopleSoft has taken aggressive steps to offer employees a tangible reason for staying. A week after the federal court’s ruling, PeopleSoft announced new compensation packages. The board of directors approved the plan to recognize the role that workers have played in the past year and to alleviate their concerns “regarding their long-term employment prospects,” according to a Securities and Exchange Commission filing.


    The plan, which is triggered if another company takes control of PeopleSoft and fires its staff, gives executives between 150 percent and 200 percent of their annual salary and bonus, plus up to two years of health coverage. Before, they were to receive 75 percent to 100 percent of their salary and bonus.


    All employees will collect at least 12 weeks’ salary and health benefits; before, they were to receive one week of salary for each year of service, and the maximum available was three months’ salary. Some employees could receive additional benefits based on their level in the company and their performance, the filing said.


    In addition, the plan accelerated the vesting schedule for employee stock options, allowing them to be exercised and sold immediately. And lest the acquiring company try to avoid complying with the new plan, the SEC report said, PeopleSoft also “authorized changes to prevent an acquirer from seeking to avoid complying with the company’s existing obligations,” although it didn’t spell out what those changes were.


    “The two things you’re always fighting when you’re facing a hostile takeover are the distraction of the event itself and the impact on morale because of the uncertainty of what’s to come,” says Lynn Bersch, a partner at the law firm Reed Smith who specializes in employment issues. “That uncertainty is a big deal when your livelihood depends on it. You don’t want to be the last employee standing.”


    Bersch calls PeopleSoft’s new packages an “extraordinary measure.” Though many businesses, particularly start-ups, have change-of-control clauses for executives, few deploy the benefits to all employees, she says.


    The compensation plan, however, could have a dual effect. Though it acts as a deterrent for Oracle, raising the cost of the takeover, it could also put off a friendly acquirer such as IBM, which has been rumored to be a potential white knight. “It’s a double-edged sword,” Bersch says.


    But Ben Watson, PeopleSoft’s senior vice president of human resources, minimizes the link between the new packages and Oracle’s takeover bid, saying it was never PeopleSoft’s intention to use the new plan as an anti-takeover tactic. The new plan, in development for several months, originated from a desire to be competitive with other high-tech companies in Silicon Valley, Watson says. Improving the company’s compensation packages adds to the “total equation” for retaining and recruiting employees: a combination of company culture, strong management, good benefits and so forth.


    For the past few years, employees had hunkered down because of the poor job market. Now that it has picked up, so have some PeopleSoft employees, says Watson, who was himself lured from Sprint, relocating from Kansas City a few months ago. “There are more opportunities for our folks,” he says. “The world knows we have good people.”


    Jeff Markham, division director for Robert Half Technology in San Francisco, says PeopleSoft isn’t the only company that has re-evaluated its approach to employee retention. “Top talent has been at the forefront of people’s minds,” says Markham, who nevertheless called PeopleSoft’s compensation package generous. “We’re seeing a lot of companies go back to [more proactive] recruitment and retention strategies, not to the extent of the late ’90s, but close to.”


    PeopleSoft launched a thorough study before changing its compensation packages. Watson declined to offer details, but said that PeopleSoft hired a “prominent name in compensation consulting” and studied the packages of several other businesses. He and other PeopleSoft managers also met with the board several times to keep it apprised of the plan’s development and to receive feedback.


Lower turnover
    Despite PeopleSoft’s efforts, some employees have been polishing their résumés and looking elsewhere. For instance, Lawson Software, a competitor, has received more résumés from PeopleSoft employees in recent months than in the past.


    Among those already lost are some top managers, including Anne Jordan, PeopleSoft’s general counsel; Dee Anna McPherson, a public relations director; Joe Davis, general manager of PeopleSoft’s customer relationship management division; Doug Merritt, general manager of PeopleSoft’s human capital management systems division; Kyle Bowker, North America vice president; and Brad Wilson, marketing chief for the customer relationship management division.


    The latest departures: Ram Gupta, executive vice president of products and technology, who was a close ally of Conway. He was replaced by Stan Swete, a PeopleSoft veteran. Renee Lorton, general manager of financial management, and Pat Quirk, vice president and general manager of supply chain management, also left.

    Steve Swasey, a spokesman for PeopleSoft, says the departures were connected to personal and career development, not Oracle’s bid. PeopleSoft has lost good employees but also hired new ones, including a few from Oracle, he says. “It’s a continuous process.”


    Davis, for example, is now the CEO of Coremetrics, a San Mateo, California, Web analytics company. “I was definitely itching to get back to [running my own company],” he says. He was replaced by George Ahn, an executive from PeopleSoft competitor Siebel Systems.


    PeopleSoft declined to reveal its attrition rate, but said it is much lower than the high of 17 percent in 1999, when the economy was bubbling and the company was undergoing a major shift in control. At that time, top executives and employees fled the company, spurred by both the perks of the dot-coms and Duffield’s departure.


“Incredible resolve”
    During the past year, PeopleSoft says, it has made sure that such an exodus doesn’t happen again. It has been offering seminars for supervisors on employee retention. The seminars were not mandatory, Watson says, but were timely in light of the fight against Oracle.


    Throughout the year, PeopleSoft has also kept up employee morale by maintaining its regular company-wide events, such as last month’s Halloween party. And at the company’s annual customer conference, held in San Francisco in September, many employees partied alongside the customers in a blowout event complete with a trapeze, an ice rink, a rock-climbing wall, carnival rides and performances by Train and Kool & the Gang.


    In addition, PeopleSoft has fostered communication through daily online newsletters, called OneVoice. It has also occasionally broadcast PeopleSoft Radio through the Internet. During the monthlong antitrust trial to determine whether Oracle’s bid should be blocked, an attorney for PeopleSoft kept a daily blog that dissected court developments.


    Overall, PeopleSoft has encouraged employees to continue to work as though the bid were not hanging over them. “Sitting around worrying about it is not going to do anything other than distract us all,” Conway said in an interview a few months before his firing.


    He applauded the employees’ efforts. One day, he said, “someone will write about the incredible resolve of our employees. These are employees whose incomes have been impacted, who have had a greater degree of difficulty in their jobs than they would ordinarily, but will not be deterred.”

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Visa Cap Didn’t Last Long

A visa program called the H-1B allows 65,000 foreign employees to enter the United States between Oct. 1, 2004, and Sept. 30, 2005. The cap has already been reached, according to CNET.


High-tech companies are big users of the H-1B. They’re lobbying Congress to raise the cap, particularly for foreign students who graduate from schools in the United States with advanced degrees. The U.S. Chamber of Commerce, a lobbying group for business interests, says that “28 percent of U.S. Ph.D. graduates in science and engineering are foreign-born individuals, and it is imperative that U.S. companies are able to recruit from this talent pool.” Among the other groups lobbying for a higher visa cap is Compete America, a coalition of 200 corporations.


Unions and labor advocates, including the AFL-CIO, say that there are so many unemployed technical employees that an increase in the cap is unnecessary.


More on immigration is available online.

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A Glass Slipper Quest for Disney

As the search for a successor to chief executive Michael Eisner gets under way at the Walt Disney Co., the board of directors won’t have far to look for top executives with a Magic Kingdom history. The company has been a launching pad for top executive talent. But one of the issues being raised in the aftermath of Eisner’s retirement announcement last month is that the high number of company defections may have left only one clear successor, Robert Iger, Disney’s current president. That may have been Eisner’s plan all along, but critics say that Iger failed in his promise to turn the company’s ABC Network division around and is not a slam-dunk to take over the top job.



    The question is how many credible successful executives remain on the Disney bench, and whether any of them have the talent to lead the company and properties, which include theme parks, motion pictures, television and cable networks, retail outlets and cruise ships.


    Eisner’s history of running off potential successors, such as Jeffrey Katzenberg, who left to form DreamWorks SKG, and Michael Ovitz, the Hollywood power broker brought in as president during the mid-1990s, is well documented. Among those who jumped ship is Paul Pressler, president and CEO at Gap Inc., who gave up his job as chairman of Walt Disney Parks and Resorts two years ago to take the top job at the $16 billion retailer. Comcast Corp. CEO Stephen Burke, whose company made an unsolicited and unsuccessful bid to buy Disney for $54 billion earlier this year, spent 12 years at the entertainment company after stepping down as president of ABC Broadcasting. Meg Whitman, president and CEO at eBay, who was ranked by Fortune magazine in 2002 as the third most powerful woman in business, launched her career as a top marketing executive at Disney.


    “There is a tremendous need for new leadership at that company,” says Bill Simon, chief of the headhunting firm Korn/Ferry’s global media and entertainment practice. He says it’s a fair criticism of Eisner’s management style that so many top executives have left. “They need someone who can move in there and build a management team.”


    Simon and others watching the Disney drama unfold also point out that Eisner has given himself and the board two years to find and groom a successor. It probably won’t take that long. The board says it would like to complete its search by June. Citing the company’s strong recent performance, it says Iger is the only inside candidate it would consider. The board is promising an open process and says that external candidates would receive “full consideration.”


    Outsiders say speeding up the process is smart. Until there is an end to uncertainty at the top, advancement within the company could be frozen, and executives would be looking over their shoulders. There could be a stampede for the door. The relatively few outside executives who are qualified to run the company might not be willing to wait two years or more to move into the top job and work beside Eisner.


    Whoever is hired will likely have to deal with the same dissident shareholder group, led by Roy Disney, nephew of the company’s founder, and Stanley Gold, a former company director, who have been directing withering criticism at Eisner and demanding he resign.


    Considering the criticism, Brad Marks, a longtime entertainment industry executive headhunter, says Eisner must play a background role. “Otherwise, he will have his handprint all over it.”


    Chuck Pappalardo, managing director of the executive search firm Trilogy Venture Search, blames the uncertainty on the Disney board and its lack of a clear succession. “This is a board issue; this is not a Michael Eisner issue,” he says.


    In the meantime, with so much uncertainty swirling around the company, recruiters will be out in force, Marks says. “Disney makes a great target for people who do what I do.”


Workforce Management, October 2004, p. 25 — Subscribe Now!

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PeopleSoft Sends Conway Packing, But Wants to Keep its Front Line

Sometimes companies give “stay” bonuses to keep top executives in place, but don’t extend those retention sweeteners to the rank and file. Last week, PeopleSoft turned that model on its head.



Amid the threat of a hostile takeover by Oracle, which could cause thousands of layoffs at PeopleSoft, the board of directors fired CEO Craig Conway. It also approved a plan to recognize the role workers have played in the course of the 16-month takeover battle and to alleviate their concerns “regarding their long-term employment prospects,” according to a Securities and Exchange Commission filing.


The plan, which is triggered when another company takes control of PeopleSoft and fires its staff, gives executives between 150 percent and 200 percent of their annual salary and bonus, plus up to two years of health coverage. Before, they received 75 percent to 100 percent of their salary and bonus. Conway, whose compensation packaged was sweetened earlier, was not included in the new plan.


All employees will collect at least 12 weeks’ salary and health benefits; previously it was one week of salary for each year of service, with a maximum of three months’ salary. In addition, the plan accelerated the vesting schedule for employee stock options, allowing them to be exercised and sold immediately.


Workforce Management will provide further information on retention at PeopleSoft in an upcoming issue of the Workforce Recruiting newsletter.


–Ellen Lee

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Attendance Rates Up for Most Employers

Absence rates are lower this year than last for most employers, according to the latest figures from the Bureau of National Affairs, a private research and publishing company.


Absence rates (the median percent of scheduled workdays that employees aren’t in attendance) are lowest for companies of 2,500 or more employees. These large firms experienced 1 percent absence rates in the first half of this year, down from 1.3 percent during the same period last year.


In the Western United States, the 1.7 percent absence rates are higher than the 1.4 percent figure in the Northeast. Manufacturing companies, at 1.4 percent, have lower absence rates than in health-care companies, at 1.9 percent.


More on attendance is available online, including the article “Sickened by the Cost of Absenteeism,” as well as absenteeism formulas and information on dealing with attendance problems in call centers.

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Workforce Technology Putting it all Together

It’s tough enough coping with a sputtering economy and relentless pressure to do more with less. But factor in upheaval among major software-application providers, a more transient workforce and the need to constantly upgrade the skills and knowledge of workers, and it’s enough to make even the most seasoned executive’s head spin. The workplace of today bears little resemblance to its counterpart of a quarter century ago. In some instances, it barely even looks like the working world of 1999.



    Companies on the leading edge have used Web portals to banish paper. They have instituted work-flow systems to eliminate the in-basket. They have embraced e-learning to deliver training and retain knowledge. And more organizations are now catching the wave. “We are in an era of enormous change. Human resources departments are feeling the pressure from all sides,” says Jim Holincheck, a research director at Gartner Inc., a market research and consulting firm.


    Navigating today’s business environment isn’t for the faint of heart. “It has been a mixed bag over the last couple of years,” says Maria Schafer, a senior program director at META Group, a technology research and consulting firm. “The human resources department is attempting to go deeper into the work cycle and employee life cycle. The emphasis is on tools that help organizations manage competencies, deal with performance and boost learning. But putting all the pieces together remains a huge challenge.”


The enterprise view
    In recent years, the ERP and HRMS markets have been flipped upside down by mergers and a general lack of spending. First, business dried up after the rush to put systems in place to address Y2K issues. Then came September 11 and a sluggish economy. The top six vendors reported a combined 14 percent gain in revenues for the first half of 2004, but once enterprise giant SAP is subtracted from the equation, net revenues were down 1 percent.


    Not surprisingly, the situation has left many vendors–and their customers–reeling. A spate of high-profile takeovers, including PeopleSoft’s purchase of JD Edwards and Oracle’s attempts to buy PeopleSoft, has generated a good deal of confusion and indecision in the marketplace. Only recently have companies begun to sort things out. “The disruption in the marketplace clearly factors into the decision-making process,” Holincheck says. “People would prefer not to buy from a vendor that’s going to be purchased.” He says there’s a growing awareness of the need to forge a solid contract. That way, “if an acquisition occurs, an organization has options” for dealing with any post-merger ambiguities.


    The trend among ERP and HRMS vendors toward adding features has not subsided. Most large organizations long ago addressed basic administrative and self-service functions. Many medium and small businesses are now turning to these capabilities for the first time, and they are being courted by large vendors that are eager to find new business in an already saturated market. The larger businesses, meanwhile, are increasingly focused on strategic initiatives such as performance management, workforce analytics, succession planning, compensation management, recruiting, and training and development.


    In fact, it seems that the mantra of the last few years–human resources must become more strategic–is beginning to take hold. At some firms, human resources executives are finally gaining respect as business decision-makers. Yet for every organization that manages to make the leap into strategic workforce management, too many others are left in the tactical trenches. Although there’s a greater awareness of strategic applications and the potential they provide, too many human resources professionals still cannot put together a strong business plan and engage in the kind of long-term planning that today’s enterprise requires, Schafer says.


    Through it all, the classic ERP vs. best-of-breed debate rages on. Some experts, such as David A. Link, a vice president of HR transformation at The Cedar Group, a Baltimore consulting firm, believe that many companies refuse to dumb down processes to adapt to the basic level of functionality that an ERP vendor’s product provides. As a result, “enterprise software vendors now recognize that they must provide more robust functionality. They understand that they must extend applications throughout the enterprise and into supply chains.” However, he also points out that best-of-breed vendors continue to find niches and fill them effectively. In fact, advances in the underlying IT infrastructure are making it simpler to mix and match applications and deliver results immediately.


Human resources applications evolve
    Only a few years ago, many companies were deploying employee self-service, first-generation recruiting software and benefits administration systems over the Web. Now that these organizations have achieved significant administrative gains, they’re turning to more strategic functions. “There is a great deal more interest in point solutions to complement a core ERP system,” says Robert Crow, a senior consultant at Watson Wyatt Worldwide in San Diego. These tools–including performance management, succession planning, recruiting, compensation management and analytics–are growing more sophisticated all the time.


    Recruiting software that initially automated the résumé-collection process is now offering greater analytical capabilities. “Instead of just hiring faster and winding up with poor candidates, we’re using the technology to hire better,” Link explains. Meanwhile, some organizations are now going so far as to outsource recruiting–a move that would have seemed radical only a few years ago, Schafer observes. “There is a greater openness and comfort level with different approaches.”


    Performance management and compensation planning are also garnering attention. A growing number of organizations are working to tie together these two functions. Over the past few years, Web-based performance-management systems have simplified the task of evaluating workers and transforming abstract corporate goals into definable actions and behaviors. Yet these applications have not solved the bigger problem of integrating compensation planning into the overall process. At the same time, stand-alone compensation-management systems have delivered only a portion of the tools required to develop a best-practice organization.


“Handling all the different
aspects–software, system integration and maintenance, call centers
and more–requires tremendous resources. It’s more than a lot of companies can handle.”


    Another hot area is workforce analytics. Tools similar to those that have transformed finance, operations and customer-relationship management are now poised to revolutionize human resources. Already, software for workforce analytics is helping companies scrutinize compensation, recruiting, retention and performance so they can make more informed decisions about how to structure human resources programs, policies and pay. “Companies are recognizing that the softer side of the business can be measured and that it’s a key factor in achieving success,” says David Ulrich, a business professor at the University of Michigan in Ann Arbor.


    Benefits administration is also receiving a good deal of attention. Holincheck says that while some companies are turning to outsourcing, all are looking to streamline processes. Basic Web functions are giving way to more sophisticated capabilities, including full enrollment, administration and account-management features. While many companies have already linked to outside service providers, including those offering 401(k)s and health benefits, highly automated systems, along with e-forms, are cutting down on paperwork, speeding transactions and improving overall service levels.


    Finally, there’s a growing interest in human-capital management. A strong emphasis on retaining core talent and institutional knowledge is leading some companies to wade through an array of issues related to recruiting, retention, turnover, benefits policies, compensation trends and learning opportunities. Crow believes that the battle for talent will intensify, and as it does, the reliance on more sophisticated solutions will grow. “A lot of companies now recognize that it’s less costly to manage an existing workforce than incur the expenses related to high turnover–including hiring, training and the loss of knowledge and expertise,” he says.


    The challenge, according to Gartner’s Holincheck, is connecting all the various systems effectively. Although portals on the front end and better integration features on the back end are making the task easier, too many organizations buy systems piecemeal and wind up with applications that do not address the broader, more strategic needs of today’s enterprise. Consequently, “there is a growing interest and emphasis on buying suites,” he says. What’s more, savvy organizations are turning to dedicated cross-functional teams to ensure that departments and operating divisions are making decisions that benefit the enterprise as a whole.


Outsourcing gains momentum
    It’s difficult to pick up a newspaper or magazine without reading a story about outsourcing. It’s one of the hottest business trends, and it continues to pick up steam. The human resources field is no exception. In July, NelsonHall, a market research firm in Washington, D.C. that specializes in business-process outsourcing, reported that the market for multi-process human resources BPO will grow at 21 percent annually, reaching $7 billion by 2008. It also forecast that the total human resources outsourcing market will grow by 11 percent, to $33 billion worldwide in 2008.


    “To date, the great majority of human resources outsourcing deals have been transaction-focused, single-process engagements, such as localized payroll services, pension and benefit administration, and recruitment. However, we are now seeing the emergence of the multi-process market,” says John Willmott, founder of NelsonHall He notes that vendors are increasingly partnering with and acquiring other firms to broaden their service-delivery capabilities. Areas of focus include organizational and people development, employee-data management, workforce planning and deployment, and human-capital services.


    Gartner Dataquest has found that the leading goals for adopting human resources business-process outsourcing include focusing on core business issues, improving service levels and reducing implementation costs. Holincheck says many companies believe that human resources outsourcing is relatively low risk compared to other activities, including sales and service functions. However, success is far from guaranteed. “The belief that outsourcing can cut costs attracts enterprises to HR BPO like moths to a flame,” he says. Enterprises “can become enlightened, but can also get burned.”


    The complexity of today’s human resources systems is fueling the outsourcing trend, says Naomi Bloom, managing partner at Bloom & Wallace, a Fort Myers, Florida, consulting firm. “Handling all the different aspects–software, system integration and maintenance, call centers and more–requires tremendous resources. It’s more than a lot of companies can handle.” An army of vendors, including Accenture, ADP, Ceridian, Convergys, EDS, Exult, Fidelity, Genesys, Hewitt, HRAmerica, IBM and TriNet, have entered the market. Bloom believes that in the future, many companies will access their ERP and HRMS through third-party providers. This could accelerate the trend toward consolidation.


    The challenge for many companies is to determine whether it’s best to outsource the entire spectrum of human resources processes, a single subprocess or a piece of a process, Holincheck says. Regardless of the precise approach, the key is to think strategically, says META Group’s Schafer. “It might make sense to outsource recruiting, payroll or benefits. One of the things that a human resources department must do is engage in long-term analysis and planning.” Total outsourcing of human resources is still far from reality, Schafer says. She has found that only about 40 large companies have taken the plunge.


    Some experts, including Link, aren’t sure that outsourcing will “overhaul” the human resources function in its entirety. “It will add tremendous value and increase flexibility, but it is unlikely to become the predominant method for running an organization,” he says. A more common scenario, for now, is the move toward the application service provider model. The potential and interest are growing quite rapidly, Crow says. “A lot of companies are looking at the ASP model because it delivers a lot of value to them from the technology perspective. They don’t have to deal with infrastructure issues, upgrades and more.”


    According to consulting firm IDC, the market for on-demand application services is projected to grow from $425 million in 2002 to $2.6 billion in 2007–a 44 percent annual growth rate. “Companies are growing more comfortable with the idea of using application service providers and other outsourcers,” Crow says. “It’s an important piece of the marketplace.”


Training and development make the grade
    A knowledge-based economy demands organizations that are smart and flexible. It’s no longer possible to ensure success with a great brand name or a stellar product. In today’s fast-changing world, an organization’s knowledge and talent determine whether it speeds to success or sputters to failure. As a result, training and development are attracting more attention than ever before. “There is a much greater emphasis on relevant training. Organizations are now tying it to business goals,” says Pat Galagan, vice president of content at the American Society of Training and Development.


    Driving this trend is the realization that a direct link exists between training and organizational success. It’s more than a need to get employees working at a functional level. It’s all about building an environment that makes the most of the organization’s potential. Consequently, companies are not only focusing on specific skills and knowledge required to perform well on the job, but also providing leadership training that helps managers maximize employees’ contributions. Employees, on the other hand, are demanding greater availability of training. “It’s a question that job candidates are asking in interviews,” Galagan says.


    According to the ASTD’s 2003 State of the Industry Report, per-employee spending at the Fortune 500 companies belonging to its Benchmarking Forum rose from $734 in 2001 to $826 in 2002. Meanwhile, the number of training hours provided per employee at these organizations grew from 24 in 2001 to 28 in 2002. Finally, spending on training as a percentage of payroll grew from 1.9 percent to 2.2 percent during the same period. While human resources is heavily involved in training, other departments and even outside providers are increasingly a part of the picture. The leading strategic areas for training and development include technical knowledge, managerial and supervisory topics, IT, professional skills, safety and compliance, customer relations, product knowledge, and interpersonal and leadership skills.


    Today, about half of the Fortune 500 operate corporate universities or plan to do so, and hundreds of other companies are following suit, according to Corporate University Xchange, a New York City research and consulting firm. In addition, many other organizations are establishing basic course work or relying on outside institutions–including Harvard, Stanford and Wharton–to pump up business knowledge. Executive education courses and executive MBA programs have become an important part of corporate learning.


    Although e-learning has played a key role in training and development over the last five years, the line between online and classroom training is increasingly blurred. In some cases, organizations are combining the two to customize content to meet the specific needs of students. ASTD estimates that about 15 percent of all learning takes place electronically. For the firms that invest the largest amounts in training, however, the figure is closer to 30 percent. Sophisticated games, simulations and multimedia course work are part of the mix. Companies are increasingly connecting training to scorecards, return on investment and overall business results.


The road ahead
    As memories of the dot-com debacle finally fade and the economy finds its footing, organizations will increasingly look to boost investment in technology and people. “Many companies are upgrading their ERP systems, boosting their strategic capabilities and investing in people,” Watson Wyatt’s Crow says. “They have the basic capabilities in place, and now they are looking to take things to the next level with work flow and automation…In today’s knowledge-based economy, they’re looking to put their dollars to maximum work.”


    Global competition, digital communication and, if predictions are true, an ongoing shortage of talent will raise the stakes and push companies to their limits. “Human resources departments that perform strategically put themselves and their organizations at a huge advantage,” Link says.

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No Cures

Health-care reform is one of those perennial issues that inspires passionate debate but resists an easy solution. In this presidential election year, the problems–historically high numbers of the uninsured; double-digit, budget-busting increases in costs to employers; rising copayments and deductibles for the insured workers–clearly outweigh the solutions being proposed by President Bush and John Kerry.


    Experts sorting through the respective health-care proposals being put up by Bush and Kerry say both plans would put a dent in the number of uninsured. That would be accomplished through a variety of incremental fixes and one big idea from Kerry–creating an entirely new plan to relieve employers of catastrophic health-care costs. But neither candidate is offering a comprehensive solution to the problems facing the health-care system, particularly costs that are shouldered by employers. “I don’t think there are any silver bullets out there,” says Neil Trautwein, vice president for human resources policy at the National Association of Manufacturers. Both candidates place emphasis on extending health-care coverage to the 45 million Americans now living without insurance.


    The two programs take decidedly different approaches. Bush’s plan places more responsibility on individuals, providing tax breaks that would enable them to take care of their own insurance needs. Kerry wants to dramatically expand government’s role in providing insurance to the uninsured, primarily by expansion of the Medicaid program. The latter plan is more encompassing and more expensive; low estimates of the Kerry plan begin at $650 billion over 10 years. The conservative American Enterprise Institute, in estimates being used by Bush, places the cost of Kerry’s plan at $1.5 trillion. The think tank estimates that Bush’s plan would cost $129 billion over 10 years. Bush’s plan would place more emphasis on individual decision-making, using tax credits and programs like health savings accounts to extend coverage to 2 million to 6 million Americans. Government-backed insurance plays a much bigger role in Kerry’s package of benefits. Central to the plan is a proposal that would provide health coverage to an estimated additional 27 million of the uninsured, nearly all of that by expanding eligibility for Medicaid, the federal-state program for the poor.


    Findley Davies Inc., a human resources consulting firm in Toledo, Ohio, predicts that health-care costs will increase 14 percent in 2005, slightly less than the 15 percent the firm is projecting for 2004, but four times greater than projected salary increases and the rate of inflation. Bruce Davis, a principal practice leader at the firm, says two factors are largely responsible: the aging of the working population and the availability of expensive new medical technologies. The pain of those costs is being felt throughout the system. Employers have coped with three straight years of double-digit increases in medical plans by shifting costs to workers. Retirement health benefits have been eliminated at many companies, and workers have been asked to contribute more in the form of copayments and deductibles. Even so, employers still pay roughly three-quarters of the $10,000 it costs to provide family coverage for each employee.


    Last year, the ranks of the medically uninsured grew by 1.4 million, the third straight year of increase. The 45 million uninsured Americans in 2003 represent 15.6 percent of the population, up from the 12.9 percent that did not have health insurance in 1987. Although Kerry is hammering away at Bush for the growing number of uninsured Americans–4 million more than when Bush took office in 2001–the problem began long before Bush was sworn in. While the number of uninsured Americans is at a historic high, as a percentage of population the numbers are about where they were under President Clinton. Clinton’s own national health-insurance plan, far more sweeping than Kerry’s because it would have provided insurance to all Americans, survived only as long as the election. It died a quick death once Clinton took office.


    A key component of Kerry’s plan is a stop-loss reinsurance plan for employers that calls for the federal government to step in and absorb most of the expenses of high-cost medical cases once they reach certain thresholds, rising from $30,000 in 2006 to $50,000 in 2013.


    Kenneth Thorpe, chair of the Department of Health Policy and Management at Atlanta’s Emory University, estimates that even though employers would have to agree to provide insurance to all their employees, companies would see a net benefit. When fully implemented, the Kerry plan would provide $35 billion a year in premium rebates to employers, while providing additional coverage would cost employers about $8.2 billion, producing an estimated net benefit of $26.6 billion, Thorpe says. Overall, the net cost to taxpayers of Kerry’s plan would be $653 billion over 10 years.


    The Democratic candidate is proposing to pay for the program by repealing tax breaks now enjoyed by those with incomes of more than $200,000. But there are enough strings attached–Kerry’s plan would be contingent on employers’ agreeing to provide health insurance to all their employees, including part-timers and seasonal workers–to make the package a tough sell in Congress.


“In the end it comes back to employees’ taking charge of their health and becoming engaged in how they access the health-care system. Clearly it is not going to be easy.
It will take time.”


    Kerry’s plan to expand Medicaid is designed primarily for three groups. Uninsured children in families that are under 300 percent of the federal poverty line ($55,200 for a family of four) would go into Medicaid and the State Children’s Health Insurance Program. Uninsured parents in families of four making under $36,800 would become eligible for state Medicaid programs as well as the children’s programs. And starting in 2008, states would enroll in Medicaid uninsured single adults and childless couples in poverty ($12,120 per couple or less). Small businesses and persons between 55 and 64 who are between jobs would be able to enroll in new health pools with the same plans offered to members of Congress and federal workers. Getting anything done will require maneuvering through the minefield of the nation’s health-care debate. An opinion piece written for the Wall Street Journal by John Goodman, president of the conservative National Center for Policy Analysis, attacks what he calls “Kerrycare” as potentially far more costly than advertised. Goodman predicts that millions of middle-income families will be enrolled in Medicaid and that many more would be pushed out of their private health plans once employers realize that the government medical insurance program is an option.


    Bush’s plan is no less controversial. Consider the fate this year of three of the president’s bedrock Republican issues. He is proposing reform of the medical-malpractice system, with caps on pain-and-suffering injuries. He would like to create a new insurance vehicle association health plans, that would allow small businesses and associations to form purchasing pools to buy insurance free of traditional state regulatory oversight. Also featured in the plan is a relatively benign change in rules governing flexible spending accounts, one that would allow employees to carry forward $500 in unused health benefits from one year to the next. Votes on the legislation were along strict party lines, with Republicans overwhelmingly in favor and Democrats just as strongly opposed. There are predictions that the proposals, with the possible exception of changing flexible spending accounts, will die in the Senate, which is more evenly divided along party lines.


    The National Association of Manufacturers, which represents scores of large and small manufacturers, favored all three Republican bills. “Rising health-care costs are a constant threat to business survival and a drain on our nation’s ability to compete in the global economy,” the association wrote in a statement supporting the measures. The proposals are also being strongly supported by the Retail Industry Leaders Association, which includes some of the largest employers in the nation. But the employer groups face powerful opponents like the 1.4 million-member American Federation of State, County and Municipal Employees Union. Charles Loveless, the union’s director of legislation, said in letters mailed to elected leaders that the bills would drive up the cost of coverage for businesses and workers alike. Loveless says the union also strongly objects to any watering down of malpractice law because it offers protection to workers. He describes FSAs as tax shelters for high-income wage earners.


Where the candidates agree
    Neither side is likely to back down. Kate Sullivan Hare, executive director of health-care policy for the U.S. Chamber of Commerce, says malpractice reform is key. “That is incredibly important. It’s a contributor to health-care inflation.” As for Kerry’s plan for the government to step in and take over most of the cost of catastrophic health care, Hare says business leaders she has talked to find it interesting, but worry about government’s expanded role and the tax increases. “Kerry gets points for addressing a real problem,” she says. “But he does it in a way that has government stepping in.”


    Linda Bergthold, a senior consultant on health-care policy with Watson Wyatt Worldwide, says she wants to see the catastrophic-health-care plan fleshed out. “Our clients are intrigued by it, but they just don’t know enough about it. The idea of pooling catastrophic claims makes a lot of economic sense.”


    Despite the sharp differences, there are some similarities that could indicate the shape of post-election health-care reform. Both Bush and Kerry include such things as wellness programs, disease-prevention campaigns and tax credits to serve as inducements to both employers and workers to make smarter health-care choices. Both also believe that significant economies could be realized through technology. Much of the health-care system still clings to paper records and has been notoriously slow in developing technology to help with patient care.


    Among employers, there also seems to be a growing belief that they will have to make their employees a lot smarter about health choices. Davis, the Ohio-based consultant, believes that human resources executives should lead the way. “In the end it comes back to employees’ taking charge of their health and becoming engaged in how they access the health-care system,” he says. “Clearly it is not going to be easy. It will take time.”


Workforce Management, October 2004, pp. 46-48 — Subscribe Now!

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Snake Oil or Science

To catch a crook or untether a dark horse en route to corporate stardom, Robert Hogan, an organizational psychologist and president of Hogan Assessments Inc. in Tulsa, Oklahoma, relies on personality inventory tests. A leader in the industry, he crafts tests meticulously, asking all kinds of questions–and sometimes repeating the same questions in subtly altered ways–to ascertain a job candidate’s tastes and preferences, level of self-confidence, achievement in school, even reactions to wounded animals and big noisy crowds. His purpose is to improve staffing decisions and thus increase ROI by giving Fortune 1000 corporations and government groups a sense of individual personality and “fit” with job requirements or corporate culture. Hogan calls his tests a probative revelation of the “bright side, the dark side and the inside.”



For example, one company, Overnight Transportation in Atlanta, was able to reduce on-the-job delinquency such as fighting, drunkenness and damage to goods or vehicles by 50 to 100 percent by using the Hogan Personality Inventory to perform mass screenings of 1,500 job candidates. Another 1,500 candidates were used as untested “controls.” Savings: more than $1 million each year. “A single accident alone can cost a company $100,000,” Hogan says.


Hogan is the editor of the book Personality Psychology in the Workplace, the bible of a movement that makes personality testing and “behavioral competence” a job-recruitment necessity. But although personality testing now touches the lives of millions of job candidates and employees at every level, not all of it is defensible. “Of the 2,500 test publishers out there, only three or four are legitimate,” Hogan says. “Most of these people are selling snake oil.”


He and other experts cite poor test construction, what Hogan calls “laughable” research-validation techniques, confused goals and test misapplication and abuse as testing problems. Even more, “lots of people are selling tests and lots of people in human resources don’t know what they’re looking at,” says Glenn DeBiasi, an industrial psychologist and corporate vice president of human resources at Alex Lee Inc., a $2.4 billion food company in Hickory, North Carolina. “While many human resources folks lack the background in statistics or research methodology to evaluate the tests, if you look behind the scenes, most test publishers themselves haven’t done a good job of demonstrating that the tests predict anything of value.”


A hedge against bad hires
 Hogan believes that his tests, at the very least, measure five key dimensions of personality, a now widely accepted psychological construct that names likability, extroversion, prudence (conscientiousness), “intellectance” (Hogan’s term for intellectual openness and creativity) and capacity to adjust as the most important. Various job descriptions call for different dimensional profiles. For example, job recruits with a high dose of likability are ideal for customer service. “You get charming, affable, helpful people,” he says. Executives with high levels of prudence, he says, “follow rules, plan ahead and respect authority.” At the low end, you get the former Enron executives who were impulsive, manipulative and deceitful. Hogan’s methods of research validation tie individual test results to projections of performance in specific job roles.


But according to Ben Dattner, who earned a Ph.D. in organizational and industrial psychology at New York University in 1999, tests mirror the people who design and commission them. Screening tools provide a political hedge and seeming defense for human resources, ostensibly to lower the risk factors associated with “wrong hires” and “undesirable turnover,” says Dattner, president of Dattner Consulting Inc., an executive performance consultancy in New York. “A conservative estimate of the cost of wrong hiring decisions or undesirable turnover is one year’s [employee] salary,” he says, citing Saratoga Institute figures. The estimate reflects the time it takes to recruit, staff, train and develop individual talents.


Gary Snodgrass, an executive vice president for human resources at Excelon Corp., a Chicago energy company formed in October 2000 from the merger of PECO Energy and Commonwealth Edison, uses multiple personality measures, work simulations, biographically based interviews and leadership-assessment measures to reveal what he describes as a composite “behavioral competency.” He likens the complex management evaluation process to “peeling an onion.”


“The process includes assessments of behavior patterns, leadership skills, delegation skills and problem-solving. We use different kinds of assessment tools based on position.” For example, the company’s candidates for middle-management positions get a battery of assessment tests that stress realistic work scenarios (also known as situational tests), structured interviews and role-playing. Industry assessment leaders such as Personnel Decisions Inc. and Development Dimensions International craft and validate these tests. “We’ve based them on assessments within our business units in which we’ve looked at the success factors involved in these jobs and measured incumbent performance ratings,” Snodgrass says. In high-level management, the company utilizes biographically based assessment interviews, structured questions that take several hours to complete. The tests work well, he says; since 2002 more than 80 percent of Excelon employees picked for selection and development have been promoted or retained their current positions. The company also scored a 15 percent improvement in “ready now” candidates deemed prepared to take on an incumbent’s job. But while composite testing methods may be an effective approach to evaluation, personality alone certainly does not determine behavior on the job, Dattner says.


“Basically, many research studies have shown that role is a better predictor of [workplace] behavior than is personality, and that when people change roles, their behavior changes. For example, people moving into sales become more extroverted because their roles demand that they be outgoing.


“There is an ongoing debate in psychology about the respective importance of ‘person’ versus ‘situation’ which is analogous to the debate between ‘nature’ and ‘nurture,’ ” Dattner says. “Organizations [produce] ‘strong’ situations that can heavily influence behavior, which is why corporations acquire their own unique cultures.” This leads Dattner to his pet criticism, namely that while corporations are well intentioned in devising tests and assessments, most of them measure the wrong things.


The problem is “fundamental attribution error,” which means that companies tend to overplay the contribution of individual traits and under-analyze the “big normative personality” of the organization.


The next big thing
John Scott, a test designer and vice president of Applied Psychological Techniques Inc., an assessment company in Darien, Connecticut, says that “situational” or “simulations” testing is becoming more popular, but much of it is bleeding edge.


“Organizations that want to put simulation-based assessment systems in place are getting very busy with us now, but as testing organizations, we need to show that these tests are valid,” Scott says. “To do that, [we] need to go through a structured process, to follow the proper test procedures, to be consistent in measurement and to go in and do a job analysis to find out what are the required skills for the job.”


Test designers must also prove that the findings of a proposed test relate back to job performance, first by testing incumbents, then by conducting additional research. To ensure predictive accuracy, tests must be designed so that high-performing incumbents should do well on the test. Test designers must prove not only that the tests are legitimate but also that they eliminate cultural and ethnic bias wherever possible, Scott says. “The bottom line is if you do your job right, you’re protected under the law; you’re going to increase ROI and reduce turnover.”


Nonetheless, no assessment tool is perfect. John Fey, a human resources manager of operations at Ameren Corp., a gas and electric utility company in St. Louis, says that “pure” psychological tests are too risky. He prefers APT’s “situational” tests, which are about to become a regular part of Ameren’s management-screening battery. “When you look at a test and say someone doesn’t have a good fit for this organization, what does that mean? It’s one thing when you don’t have the [technical] aptitude to do a power plants job, and that’s demonstrated on a test. People can accept that. But when you say, ‘Your personality doesn’t fit our culture,’ you set yourself up for legal challenges.”


Workforce Management, October 2004, pp. 90-92 — Subscribe Now!