Human Capital Services
Comprehensive Guide to Human Capital Services
• 201 public and private companies/divisions profiled
• 14 sub-sectors analyzed – description, perspective, and trends
• Perspective on short and long-term factors driving this secular growth industry
Business Services Research
February, 2008
Mark S. Marcon, CFA [email protected] 414.298.7556
Sean P. Connolly, CPA [email protected] 414.765.3552
Jeffrey P. Meuler [email protected]
Comprehensive Guide to Human Capital Services
Mark S. Marcon, CFASean P. Connolly, CPA Jeffrey P. Meuler
This report provides Baird’s comprehensive guide to the growing human capital solutions sector. In this report, we attempt to layout the landscape of the space. We also attempt to provide a perspective on near-term and longer-term trends impacting the overall space, profiles of 14 sub-sectors within human capital services as well as a description of 201 providers that compete in the space.
In describing human capital solutions, we are referring to companies that help organizations more effectively or efficiently address their human capital needs. These human capital needs range from human capital planning, to recruiting, to deployment, to performance management, as well as routine HR functions such as administering payroll and benefits.
Looking out over the near term, as well as long term, we believe that the human capital solutions space will provide many compelling investment opportunities. We believe that these investment opportunities will be a function of several factors: First, due to several secular drivers outlined within the report, we believe this broad sector will experience well above average growth over the next 10 to 15 years. Second, many of the business models in the space are highly scalable with the potential for very high margins. Third, capital requirements for organic growth are relatively low resulting in high returns on invested capital for many companies.
While the sector is likely to achieve solid secular growth, there are many sub-sectors that are cyclically sensitive, being tied to the employment cycle. As such, the sector will likely continue to experience wide (often illogical) cyclical variations in valuation that will provide attractive entry points to both public and private investors. As we enter a period of cyclical slowing, we are seeing what we consider very attractive valuations for investors with longer-term horizons. This is occurring before what we believe will likely be the best long-term period for many human capital service providers. The projected acceleration in retiring baby boomers and associated talent shortages and churn in the U.S. and Europe starting in 2009 and increasing through 2022 is likely to create a favorable environment for many companies in the space.
We also note that in certain sub-sectors, barriers to entry are relatively low with low capital requirements. The combination of a perceived growth sector, along with low barriers to entry, and an accelerating pace of technological change will lead to many new entrants in many of the emerging sectors, some that will be huge successes, while some will turn out to be spectacular flops.
Within the report, we outline the following: • Long-term secular trends
• Short-term trends
• Long-term investment themes • The HR challenge
• Profiles on 14 human capital solutions sectors • Profiles on 201 providers
T
ABLE OFC
ONTENTSSummary of Long Term Secular Trends……..……….……….…. 7
Summary of Short Term Secular Trends………. 8
Long Term Investment Themes…….……….. 10
The HR Challenge: An Overview………..11
Business and Investment Opportunities in the Human Capital Continuum……….. 26
Staffing and Work Force Solutions Executive Search Recruitment Process Outsourcing (RPO) e-Cruiting Assessment and Verification Talent Management Suites/Systems HR Vendor Management Systems (VMS) HRMS Software Solutions Time & Attendance HR Outsourcing Professional Employer Organizations (PEO) HR Consulting Human Capital Point Solutions / Miscellaneous Services Human Capital Separation / Outplacement Services Staffing and Work Force Solutions………. 93
Global Staffing Providers Adecco SA
The Goodwill Group, Inc. Kelly Services, Inc. Manpower, Inc. Randstad Holdings NV Robert Half International, Inc. Vedior NV
Major Staffing Providers Allegis Group, Inc. Aquent
CBS Personnel Holdings, Inc. CDI Corporation
COMFORCE Corporation Comsys IT Partners, Inc. CORESTAFF Services EmployBridge
Global Employment Holdings, Inc. Hudson Highland Group, Inc. Kforce, Inc.
MPS Group, Inc.
Nelson Family of Companies RCM Technologies, Inc. Resources Connection, Inc.
The Select Family of Staffing Companies Spherion Corporation
Technisource, Inc. TrueBlue, Inc. Veritude
Volt Information Sciences, Inc. Westaff, Inc.
The Day and Zimmerman Group, Inc. (Yoh) Healthcare Staffing Providers
Allied Healthcare International, Inc. AMN Healthcare Services, Inc. CHG Healthcare Services Cross Country Healthcare, Inc.
Medical Staffing Network Holdings, Inc. On Assignment, Inc.
U.S. Nursing Corporation
Executive Search………116
CTPartners
Egon Zehnder International
Heidrick & Struggles International, Inc. Korn/Ferry International
CDI Corporation (Management Recruiters International, Inc.) Russell Reynolds Associates, Inc.
Spencer Stuart
Whitehead Mann Partnership LLP
Recruitment Process Outsourcing (RPO)………...121
Accolo, Inc.
The Goodwill Group, Inc. (Advantage Human Resourcing) Alexander Mann Group, Ltd.
Capital Consulting CRI, Inc.
Korn/Ferry International, Inc. (Futurestep) Hyrian, LLC
Kelly Services, Inc. (Kelly HRfirst) Kenexa Corporation
Volt Information Sciences, Inc. (Momentum) Novotus, LLC
Pinstripe, LLC
Omnicon Group, Inc. (Recruitment Enhancement Services) The RightThing, Inc.
Spherion Corporation Adecco SA (TalentTrack)
The Day and Zimmerman Group, Inc. (Yoh)
e-Cruiting………. 131 51Job, Inc. Adicio, Inc. Arbita CareerBuilder.com ComputerJobs.com Craigslist, Inc. Dice Holdings, Inc. DirectEmployers.org eQuest
Google, Inc. (Google Base) Yahoo!, Inc. (HotJobs.com, Ltd.) Indeed, Inc.
Jobing.com, LLC Jobster, Inc.
LinkedIn Corporation TheLadders.com Monster Worldwide, Inc. NationJob, Inc. Net-Temps, Inc. NowHiring.com SearchEase.com Corporation SelectMinds, Inc. SimplyHired.com SnagAJob.com, Inc. StepStone Vault, Inc.
Assessment and Verification………..146
Acxiom Corporation (Acxiom Information Security Services)
Automatic Data Processing, Inc. (ADP Screening and Selection Services, Inc.) Manpower, Inc. (CareerHarmony)
ChoicePoint, Inc.
Development Dimensions International, Inc. employeescreenIQ
First Advantage Corporation General Information Services, Inc. HireRight, Inc.
Marsh and McLennan Companies (Kroll, Inc.)
Reed Elsevier, PLC (LexisNexis Authentication & Screening) PreVisor, Inc.
Sterling Testing Systems, Inc. TALX Corporation
U.S. Investigation Services Verifications, Inc.
Verified Person, Inc.
Talent Management Suites/Systems...….……… 156
Automatic Data Processing, Inc. (ADP VirtualEdge) AIRS
Authoria, Inc.
Kronos, Inc. (Deploy Solutions, Inc.) Halogen Software, Inc.
Kenexa Corporation
Kronos, Inc. (Kronos Talent Management) Peopleclick, Inc. Plateau Systems, Ltd. Softscape, Inc. SuccessFactors, Inc. Taleo Corporation VCG, Inc.
Vurv Technology, Inc. Workstream, Inc.
HR Vendor Management Systems (VMS)……… 165
MPS Group, Inc. (Beeline) MPS Group, Inc. (Chimes) eWork, Inc.
Fieldglass, Inc. IQNavigator, Inc. PrO Unlimited Taleo Corporation
Nelson Family of Companies (WorkforceLogic)
HRMS Software Solutions………170
Infor Global Solutions Lawson Software, Inc. Oracle/Peoplesoft Sage Software, Inc. SAP AG
Ultimate Software Group, Inc. Workday
Time and Attendance………..………..175
CyberShift, Inc. Kronos, Inc.
Paychex, Inc. (Stromberg) Valiant
Infor Global Solutions (Workbrain)
HR Outsourcing………..179
Accenture HR Services
Affiliated Computer Services, Inc. ARINSO International NV
Automatic Data Processing, Inc. Capita Group, PLC
Ceridian Corporation
Citigroup and Statestreet (Citistreet, LLC) CompuPay, Inc.
Convergys Corporation E-Duction, Inc.
Electronic Data Systems and Towers Perrin (Excellerate HRO, LLC) Empagio
Fidelity Employer Services Company (FESCo) Genesys Software Systems
Hewitt Associates, Inc. IBM Business Consulting JAT Computer Consulting, Inc. Mercer LLC
PAI Group, Inc. Paychex, Inc. Paycor, Inc. PayCycle, Inc.
PayFlex Systems USA, Inc. Payformance Corporation
The Sheakley Group of Companies SurePayroll, Inc.
USI Holdings Corp. (Univers Workplace Benefits) WageWorks, Inc.
Professional Employer Organizations (PEO)….………....194
Administaff, Inc.
Automatic Data Processing, Inc. (ADP TotalSource/ADP Resource) Advantec
Ambrose Employer Group, LLC Barrett Business Services, Inc. Gevity HR, Inc.
Oasis Outsourcing, Inc.
Paychex, Inc. (Paychex Premier/Paychex Business Solutions) SCI Companies
Strategic Outsourcing, Inc. TriNet Group, Inc.
HR Consulting……… 201
Aon Corporation
Affiliated Computer Services, Inc. (Buck Consultants) Capital H Group
Guardian Life Insurance Co. of America Hay Group, Inc.
Hewitt Associates, Inc. Mercer LLC
Towers Perrin, Inc.
Watson Wyatt Worldwide, Inc.
Human Capital Point Solutions / Miscellaneous Services………. 207
Automatic Data Processing, Inc. (ADP Employease, Inc.) Intuit, Inc.
OneClickHR, PLC Saba Software, Inc. Salary.com, Inc. SHPS, Inc. SkillSoft, PLC Workscape, Inc.
Human Capital Separation / Outplacement Services……….. 212
Drake Beam Morin, Inc.
Adecco SA (Lee Hecht Harrison)
Manpower, Inc. (Right Management Consultants)
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Major drivers and trends that will impact demand for human capital solutions over the long term include: • Demographic shifts are likely to lead to talent shortages. Significant demographic shifts across
the Western industrialized nations and Japan will lead to a marked increase in retirements, increased replacement hiring, and lower growth rates (and in some cases declines) of the labor force in a number of major economies. Due to the upcoming retirement of the baby boom generation, the overall growth in the labor force should slow dramatically, particularly in the number of prime workers (ages 25-44). Retaining existing human capital will also become increasingly difficult due to a trend in declining worker tenure driven by a decline in worker loyalty and increased information about alternative employment options brought about by the internet. • “Talent management is the engine that drives wealth creation.” This statement may appear to be
hyperbole at first glance, but it is increasingly true as Western economies continue to shift more towards knowledge-based economies. In prior decades, the largest companies in the S&P 500 tended to be traditional manufacturing, energy, and consumer products whereas now more companies are from the technology, pharmaceutical, and services industries. Companies in these industries tend to derive their competitive advantages more from their ability to leverage intellectual or human capital than from achieving economies of scale.
• Globalization. Multinational companies have been expanding globally much more so than they did a decade ago. In our opinion, this is a trend that will likely continue. As a result, multinational companies are increasingly looking for products with the technology to support global operations as well as service providers with geographic footprints large enough to meet their global demands. This also creates opportunities for companies that help to build or support multinational work forces.
• Technological Change. There are two aspects of technology that are likely to impact the usage and demand for Human Capital Solutions. First, the pace of technological change is increasing, which increases the cost and risk for organizations that develop and maintain their own HR systems. Often it is better to rent HR systems and software, and replace them with new packages as new technology is developed. Second, in previous years, some HR departments felt that relying on outside vendors for the delivery of HR services could diminish service quality, reduce the access to information for employees, result in loss of control and potentially damage corporate culture. However, these have been mitigated with the advent of the internet as services can be delivered seamlessly to clients in a manner that is transparent to employees.
• Increasing Regulatory Burdens. HR is charged with complying with an ever-increasing number of new government laws, rules, and judicial rulings. The HR department within a corporation is usually responsible for compliance with a wide range of legal areas such as compensation policies, discrimination, employee benefits, hiring policies, medical time off, occupational safety and health, payroll administration and workers’ compensation insurance. Each of these broad legal areas may cover tens or hundreds of specific regulations which are often subject to change. Within the past two years, there has been significant new legislation, legal rulings or interpretations affecting retaliation claims against employers (a section of the Civil Rights Act of 1964), the Family and Medical Leave Act, and the Pension Protection Act of 2006. Managing the regulatory environment becomes even more complex as companies expand internationally and have to manage workforces across multiple geographies with different legal structures.
• Constant need for HR to be more efficient. Although more organizations are beginning to view HR as a fundamental operation underlying their long-term success rather than merely a cost center, corporations’ overall focus on maximizing economic profit will likely result in the HR function in most organizations continuing to be constrained by budgetary pressures, thereby forcing them to become more efficient.
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Major drivers and trends that will impact the demand for human capital solutions over the short to medium term include:
• Cyclical slowing. Over the near-term, economists have mixed opinions whether the U.S. economy is in a mid-cycle slowdown or entering a more pronounced macroeconomic downturn, including a potential U.S. recession. Equity markets, at this time, are certainly concerned about the possibility of a recession. U.S. job growth has slowed, especially in more cyclicallysensitive industries, but still remains slightly positive on both a year over year and sequential basis; however, other data points have been more concerning, as has been the recent tightening in credit markets. Demand for many human capital services is cyclically sensitive. A significant slowdown or recession will reduce demand in many sectors over the near term.
• Emergence of a new generation of public companies. Previously, a majority of the public companies in the human capital services space were staffing companies such as Manpower and Robert Half, or outsourcing companies such as ADP, or larger HRMS providers like PeopleSoft/Oracle. There has recently been an emergence of public companies that focus on providing technology solutions to assist with human capital management. Such companies include Taleo Corporation (TLEO), Kenexa Corporation (KNXA), SuccessFactors, Inc. (SFSF) and Salary.com, Inc. (SLRY).
• Emergence of Software as a Service (SaaS). There will likely be a continued shift towards human capital solutions providers delivering their services via a Software-as-a-Service (SaaS) model. Many of the solutions delivered via a SaaS model are configurable and are often easily integrated with ERP systems. As a result, HR departments that employ software delivered via a SaaS model can address non-core, routine business processes such as payroll processing and benefits administration using superior software without the cost of having to build and maintain their own software or undergo costly integrations with their existing systems.
• Blurring of the lines between industry sub-sectors. Our observation is that many HCS players used to focus on specific HR functions but are now merging into other adjacent sub-sectors. For example, ADP used to be a provider of payroll processing but now offers pre-employment screening, applicant tracking and outsourcing services as well. This shift has blurred the competitive landscape. For example, Kenexa (KNXA) competes against SuccessFactors (SFSF), which is a pure SaaS provider focused on performance management, as well as staffing companies such as Manpower and Spherion in terms of recruitment process outsourcing.
• The bloom is off the rose of comprehensive HR outsourcing. There will likely be a continuation of outsourcing; however, there has been a shift away from full, comprehensive HR outsourcing arrangements for large companies. Instead, contracts are becoming smaller in nature and entail outsourcing only specific functions such as payroll, benefits, learning & training and recruiting (RPO). Early comprehensive HR outsourcing arrangements resulted in significant losses for many service providers as many of the contracts were inadequately priced (from the providers’ perspective) and took longer to implement than expected often due to unforeseen complexities and skills shortages at the providers.
• There is an ongoing shift towards consumer-driven healthcare. According to the Kaiser Family Foundation and the Health Research and Education Trust’s Employer Health Benefits 2007
Annual Survey, premiums for family health coverage have increased 78% since 2001 while
wages have increased 19% and inflation has increased a total of 17%. Due to the rapid rise in healthcare costs, many companies are shifting to consumer-directed healthcare plans which tend to have much lower premiums but higher deductibles in order to reduce healthcare costs. In addition, companies are also offering more tax-advantaged programs such as health spending accounts (HSAs). Rising healthcare costs and the availability of alternative forms of healthcare
plans should help spur demand for the services of HR and benefits consultants. In addition, there is the potential that companies could shift to using more temporary workers in order to reduce healthcare costs as these workers often do not accrue full benefits.
• Legislation is continually changing and becoming increasingly fragmented. In the U.S., states are becoming increasingly impatient in terms of waiting for legislation to pass at the federal level. As a result, many states are beginning to pass their own legislation on key issues resulting in a fragmented legal system which makes adhering to the law more time-consuming and difficult for larger companies that operate in numerous states. A prime example of this is the failure of the Federal Government to pass comprehensive immigration reform. During 2007, every state debated immigration issues and 41 states adopted immigration laws. For multinational companies, issues are even more complicated.
• Potential for M&A to increase. A cyclical slowdown will likely stress a number of players. Credit tightening will further exacerbate the stress. This will create an opportunity for larger players with strong balance sheets to consolidate some sub-sectors at attractive prices. Eventually financial markets will normalize which will also create opportunities for financial buyers.
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• Talent Shortage: Investments in staffing and recruiting companies represent one potential avenue to capitalize on the expected talent shortage in upcoming years. Staffing, executive search and recruitment process outsourcing companies are naturally positioned to help solve this issue as their candidate databases, geographic expertise/presence, advanced technologies, reputation and use of best practices position them to be intermediaries in the hiring process. With respect to staffing companies, we believe the best long-term areas for investment are: (1) large, well capitalized global staffing firms, (2) professional staffing firms (finance and accounting, legal services, IT, engineering, etc.), and (3) companies with a small- and middle-market focus. For executive search firms, we believe the best long-term investments are in those companies with: (1) established records and strong reputations, (2) functional or geographic expertise, (3) the ability to attract the strongest recruiters, and (4) sophisticated IT/technology and global networks that enable search firms to compete globally and to maintain databases on past candidates. We believe that the best long-term areas for investments in RPO providers are those with: (1) significant scale to their operations, (2) enhanced technology, and (3) an international presence. • Global workforces: Given the recent trends towards globalization, which we believe will likely
continue, multinational companies are increasingly looking for products with the technology to support global operations as well as service providers with geographic footprints large enough to meet their global demands. There is a high level of investment required to build out global networks, open international offices, understand the legal environments in numerous countries, and development technology capable of servicing global clients. Therefore companies that have already made these investments have an advantage in that replicating these efforts are often cost prohibitive for smaller competitors. Global capabilities can be a key differentiating factor between staffing, executive search, RPO, technology and outsourcing providers.
• Technology Enablement: HR departments are continually under pressure to improve efficiency and lower costs and, as a result, HR departments are increasingly utilizing technology to do so. In addition, in tight labor markets where candidates are scarce and may be receiving competing offers from firms, the speed at which a company is able to source qualified candidates, perform the necessary screening and interviewing, and issue an offer is critical. Delays in these processes can result in companies not finding qualified candidates or losing potential candidates to competitors. As a result, we believe that a long-term area for investment is in companies that provide specific HR technologies that help to improve efficiency of the HR function such as applicant tracking systems, job boards, vendor management systems and performance management systems. In addition, staffing and recruiting providers that are more technology enabled than their competitors are likely to have an advantage in terms of sourcing candidates and reducing time to hire. Lastly, service providers that are integrated with ERP/HRMS systems have an advantage as companies can implement their product/services while avoiding integration costs.
• Outsourcing: We continue to believe that HR departments need to focus on core competencies such as recruiting, retaining, and optimizing the right talent as well as other value-added functions while outsourcing non-strategic functions. Preparing a payroll run or administering benefits are not core competencies of most firms nor do they provide strategic value. We believe HR departments will continue to turn to outsourcers to address non-core, routine business processes in an effort to improve efficiency and at the same time reduce their costs. As mentioned previously though, future demand for outsourcing services will likely be for individual HR processes as opposed to comprehensive HR outsourcing arrangements given the implementation difficulties in the larger deals.
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Human Capital Management (referred to as HCM or more generally the HR function) encompasses the acquisition, development, and administration of a firm’s employees, or human capital. A typical U.S. company spends approximately 0.5-1.0% of revenue on traditional HR functions, excluding the actual compensation and benefits costs for employees that are usually the biggest expense items for many corporations. Typical processes within the HR function include:
• Workforce planning -- consistent usage of one form or the other • Recruiting and staffing
• Employee on-boarding • Training and development • Payroll processing
• Pension and 401(k) administration • Employee administration • Health and welfare administration • Compensation policies
• Employee guidelines and communication • Legal compliance
• Separation administration
The HCM model has changed significantly over the past 100 years and continues to evolve. Major changes within the past decade have been driven by technological innovation and by corporations’ overall focus on efficiency improvement and maximizing economic profit.
Many HR departments have historically been viewed as cost centers that increase overhead while offering little added value. As a result, a primary focus of corporations was minimizing the cost of their HR departments through automation and cost cutting. In our opinion, a significant shift is underway in terms of how the most progressive and successful organizations view HCM. Many progressive organizations are increasingly viewing HR as a fundamental operation underlying their long-term success rather than merely a cost center. This change in mindset is driven in part from the transition of the U.S. and other developed economies away from manufacturing towards more knowledge-based services. We believe this important shift will occur in HR in conjunction with the following trends:
Outside The Firm
• New human capital will become increasingly difficult to acquire due to the slowing growth rate of the labor force and changing population demographics which will decrease the number of available prime workers.
• Complexity will increase. HR departments will continue to be charged with maintaining compliance with an increasing number of new laws and regulations imposed by the federal and state agencies, as well as an increasingly active judiciary system. Managing the regulatory environment becomes even more complex as companies expand internationally and have to manage workforces across multiple geographies with different legal structures.
Inside The Firm
• Retaining the right human capital will become increasingly difficult due to a trend in declining worker tenure driven by a decline in worker loyalty and increased information about alternative employment options brought about by the internet.
• Technological and legislative changes have the ability to dramatically affect the demand for certain kinds of specialized labor for short periods of time. For example, following the adoption
of the Sarbanes-Oxley Act, there was a significant increase in the demand for accounting professionals in 2004 and 2005 to assist public companies and auditing firms with the initial rounds of compliance with the Act. However, demand for accounting professionals due to SOX compliance fell off significantly in 2006 and 2007. Similarly, there was a significant rise in demand for IT professionals prior to Y2K as well as during the earlier days of web development; however, these periods of high demand were short-lived. Such dramatic rises and falls in demand for certain skill sets result in a need for companies to utilize more flexible workforces in order to have the right people at the right time.
• The HR function in most organizations will continue to be constrained by budgetary pressures thereby forcing them to become more efficient.
These dynamics give rise to what we call The HR Challenge (see Figure 1.1).
FIGURE 1.1
Source: Baird
In response to these challenges, we believe that four main actions will occur as companies focus on their strategic objectives: first, HR departments will continue to focus on recruiting, retaining, and optimizing the right talent as well as other value-added functions in order to help corporations thrive. Second, organizations will increasingly utilize technologically sophisticated products and systems to improve efficiency. Third, organizations will either outsource non-core, low-value-added HR functions to outside vendors that can perform the functions more efficiently or employ new software products, often delivered through a Software-as-a-Service (SaaS) model, to automate many HR functions. Fourth, organizations
War for Talent Administrative Burden
Ex te rn al Dr iv er s In te rn al Dr iv er s Low Unemployment
Employee Turnover Budget Pressures
Complexity of HR
Responses to the HR Challenge
•Outsource Nonstrategic Functions •Adopt Technologically Sophisticated Systems to Help Achieve Objectives Focus on Strategic Objectives •Attract & retain quality people •Improving Organization Effectiveness •Adopt Progressive Human Capital Management Practices •Increasingly Using International or Flexible Workforces
The Human Resources Challenge
War for Talent Administrative Burden
Ex te rn al Dr iv er s In te rn al Dr iv er s Low Unemployment
Employee Turnover Budget Pressures
Complexity of HR
Responses to the HR Challenge
•Outsource Nonstrategic Functions •Adopt Technologically Sophisticated Systems to Help Achieve Objectives Focus on Strategic Objectives •Attract & retain quality people •Improving Organization Effectiveness •Adopt Progressive Human Capital Management Practices •Increasingly Using International or Flexible Workforces •Outsource Nonstrategic Functions •Adopt Technologically Sophisticated Systems to Help Achieve Objectives Focus on Strategic Objectives •Attract & retain quality people •Improving Organization Effectiveness •Adopt Progressive Human Capital Management Practices •Increasingly Using International or Flexible Workforces •Adopt Progressive Human Capital Management Practices •Increasingly Using International or Flexible Workforces
will increasingly adopt progressive management practices such as using international or flexible workforces to help meet their demand for labor.
The HR Challenge: Low Unemployment
On a seasonallyadjusted basis, the unemployment rate declined gradually from a peak of 6.3% in 2003 to a cyclical low of 4.4% in both October 2006 and March 2007 (Figure 1.2).
FIGURE 1.2 - U.S. UNEMPLOYMENT RATE
Source: Bureau of Labor Statistics
Over the near term, economists have mixed opinions whether the U.S. economy is in a mid-cycle slowdown or entering a more pronounced macroeconomic downturn, including a potential U.S. recession. U.S. job growth has slowed, especially in more cyclicallyensitive industries, but remains positive on both a year over year and sequential basis. However, some economic data points, such as new home construction have been more concerning, as has been the recent tightening in credit markets. However, taking a longer-term view, we believe the economy is poised for an escalation in the war for talent due to several reasons, which we discuss below.
There has been declining severity of economic downturns in recent years. Unemployment peaked at 6.3% in June 2002 compared to 7.3% when the recovery began following the 1990-1993 recession. During the next recession, we anticipate that the unemployment rate will most likely peak at a lower level than it has in previous U.S. slowdowns.
Companies appear to have been cautious in their hiring practices over the past few years. Often
times, companies cut staffing levels excessively when there is a slowdown and then have difficulty recruiting capable staff once the economy rebounds. The reverse can also be true, as exhibited by the over-hiring of employees (many of whom had long-term contracts that subsequently drained the firms’ financial resources) by some firms in the late 1990s. Currently, we have not observed this phenomenon thus far as most firms appear to have retained a more cautious approach to hiring this cycle.
Companies that derive competitive advantage from intellectual and human capital are prominent in the top ranks of the S&P 500. As shown in Figure 1.3, in prior decades the largest companies were
traditional manufacturing, energy, and consumer products companies whose competitive positions were in part determined by their ability to achieve economies of scale. In 1980, 17 of the 20 largest market cap companies came from these industries compared to 12 in 1990 and only seven in 2007. In their place are companies from the technology, pharmaceutical, and services industries. Companies in these industries tend to derive their competitive advantages more from their ability to leverage intellectual or human capital than from achieving economies of scale. We believe that this shift in market valuations supports the argument that human and intellectual capital is replacing property, plant, and equipment as the most
critical assets for most U.S.-based organizations. It is also interesting to note that GE, the second-largest company by market capitalization, is an old-line industrial company but is also widely noted by HR professionals and academics as being one of the leaders in HCM.
FIGURE 1.3 – LARGEST U.S. PUBLIC COMPANIES BY MARKET CAP
Source: FactSet
Studies dating back to the late 1990s reveal the increasing importance of human capital. Studies
by the consulting firm McKinsey & Co. point to the increasing influence of human capital on corporate performance. In fact, McKinsey is credited with coining the phrase “War for Talent.” The company’s studies not only point to the coming demographic shortage of human capital, but also indicate the following:
1. Superior human capital leads to superior corporate performance;
2. “A” level employees contribute significantly more to corporate performance than “B” or “C” level employees;
3. Human capital is a generally undervalued production factor; and
4. Only in a few select professions (private equity, asset management, professional sports, investment banking, hedge fund management, law, and medicine) is human capital rewarded in a manner that is consistent with its incremental contribution.
Demographic and cultural changes have caused a scarcity of human capital resulting in lower unemployment levels than in previous cycles. In both 2000 and 2007, the unemployment level in the
U.S. reached levels not seen since early 1973. In addition, the unemployment rate during the 2001 recession was lower than in the previous four recessions. Despite the rapid rise in the unemployment rate in 2001, the peak in unemployment was still well below the levels reached during the 1974-75, 1980, 1981-82, and 1990-91 recessions (See Figure 1.2).
The data presented in Figure 1.2 disguises the fact that the labor supply for educated professionals is much more limited. Figure 1.4 shows that unemployment among professionals with a four-year degree has been in the 1.5-3.5% range over the last 15 years, well below the overall unemployment rate.
1980 1990 June 2007
Company Mkt. Cap ($B) Company Mkt. Cap ($B) Company Mkt. Cap ($B)
IBM $39.6 IBM $64.6 Exxon Mobil $474.4
AT&T $36.1 Exxon $64.4 General Electric $385.3
Exxon $34.8 General Electric $50.1 Microsoft $292.8
Amoco $23.3 Philip Morris $47.9 Citigroup $269.6
Schlumberger $22.3 Bristol Myers $35.1 AT&T $250.7
Shell Oil $18.0 Merck $34.8 Bank of America $225.4
Standard Oil $17.7 Wal-Mart $34.6 Wal-Mart $204.4
Mobil $17.2 AT&T $32.9 Procter & Gamble $199.9
Chevron $17.0 Coca-Cola $31.1 Pfizer $194.3
Atlantic Richfield $15.1 Procter & Gamble $30.0 American International Group $188.9 General Electric $14.0 Bellsouth Corp. $26.4 Johnson & Johnson $183.5 General Motors $13.3 Amoco $26.3 JPMorgan Chase $177.3
Texaco $12.9 Chevron $25.5 Chevron $176.7
Eastman Kodak $11.3 Du Pont $24.6 Cisco $162.6
Haliburton $9.8 Johnson & Johnson $23.9 IBM $158.2
Phillips Petroleum $8.9 Mobil $23.3 Google $155.3
Gulf Corp. $8.5 Bell Atlantic $21.1 Altria $151.0
Unocal $7.7 General Motors $20.8 Intel $129.3
Union Pacific $7.6 Pepsico $20.5 ConocoPhillips $128.9 Getty Oil $7.5 Atlantic Richfield $19.6 Verizon $124.9
FIGURE 1.4 – UNEMPLOYMENT RATE OF COLLEGE GRADUATES (VS. OVERALL UNEMPLOYMENT RATE)
Source: Bureau of Labor Statistics
Although the overall unemployment rate may again rise modestly in the near term (it is a lagging indicator), we believe it will likely not pass the prior peak of 6.3% (June 2003). We note that 6.3% is well below the 7.8% and 10.8% peaks reached in the 1990-91 recession and 1981-82 recessions, respectively. Lastly, as we have also seen during the 2001 downturn, a weakening labor market would likely have much less of an impact on highly skilled professionals.
The overall growth in the labor force should slow dramatically. Over the past four decades, the U.S.
economy has benefited from a labor force that has doubled in size and has become increasingly more educated. At the center of this growth was the influx brought on by the addition of the baby boom population as well as two other significant factors: (1) a rapid increase in the number of women who work outside the home, and (2) a rise in immigration. The labor force grew 50% from 1980 to 2000, with the majority of growth occurring in workers aged 25-54 and a disproportionate share of them being women (source: The Aspen Institute). This is likely to change significantly. As illustrated in Figure 1.5, the compound annual growth rate for the U.S. labor force has been slowing significantly, and growth over the next 50 years will almost certainly be well below the growth rate achieved over the last 50 years. In particular, growth in the 25-54 aged population has been slowing and will continue to slow as baby boomers age. Additionally, participation rates for women in the workforce have leveled off around 60%, nearly doubling from roughly 30% following World War II. In addition, as discussed later on, the growth in immigration is likely to slow, although this is much more difficult to project. However, one factor that could partially offset the aforementioned headwinds to labor market growth is a rise in the participation rate of individuals aged 55+ (which will likely be most pronounced for those aged 65+).
U.S. Unemployment Rate
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 1 992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 College Educated UE Rate UE Rate
U.S. Prime-Aged (25-54) Labor Force vs. Population Growth 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2000 2010 2020 2030 2040 2050
Labor Force CAGR Population CAGR
FIGURE 1.5 – U.S. COMPOUND ANNUAL LABOR FORCE GROWTH (% PER DECADE)
Source: Bureau of Labor Statistics
We believe the number of prime workers will decline. The number of prime workers (ages 25-44) is
forecasted to decrease in coming years. Within the HR community, workers in the 25-44 age bracket are considered to be prime because they make up the broad pool that is normally targeted by corporations. Generally, this group is viewed as committed to a career, while possessing maturity, savvy, energy, and ambition. The prime worker group is also the group from which management talent is usually selected and groomed for future leadership positions. Also, labor participation rates peak between ages 25-44. As Figure 1.6 indicates, the number of prime workers in the United States is forecasted to fall 4% to 79 million between 2000 and 2010. Based on historical trend lines, we estimate that real GDP will be in the 2-4% range over the next ten years. Obviously, there is a large disconnect. This trend has important ramifications for the human capital industry since the talent pool of prime-aged workers, which drove much of the growth throughout the 1990s, will likely shrink.
FIGURE 1.6 U.S. PRIME WORKERS
Source: Bureau of Labor Statistics
We believe the growth rate of mature workers will decline. Not only is there an absolute decline in the number of prime workers, but there will also be a significant decline in the growth rate of the number of mature workers in general. For example, Figure 1.7 shows that the 25-54-year-old age group is not
US Population Age 62 by Year 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 5,000,000 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
large enough to maintain the growth rates that the United States has experienced over the past 20 years. Again, there is a relatively dramatic slowdown in the projected growth rate of the civilian labor force for this group.
FIGURE 1.7
1980 1990 2000 2010e
Civilian Labor Force Aged 25-54 (MM)
67
88
100
105
%
Change
33% 13% 5%
CAGR
2.9% 1.5% 0.5%
Source: Bureau of Labor Statistics
We believe companies will face an older workforce and an increasing number of retirees. Another
factor that organizations are expected to deal with is the increasing age of the workforce and, ultimately, the large increase in the number of retirees.
According to the BLS, the median age of the labor force is projected to hit 40.6 years in 2010, due to the aging of the baby boomers. This is up significantly from a median age of 34.6 in 1980 and 36.6 in 1990 and highlights the potential for “brain drain” in our economy. The “brain drain” phenomenon simply refers to the loss of knowledge and experience without replacement, which could occur to a certain degree when the aging baby boomer population starts retiring or changing careers.
Currently, the BLS is actually assuming that worker participation rates will increase significantly for the boomer generation versus previous generations. Current assumptions are that labor participation rates for adults 55 and older will jump to 37.1% by 2010, versus 30.1% in 1990 and 32.3% in 2000. Even assuming these higher participation rates, the number of retirees is projected to increase significantly (see Figure 1.8).
FIGURE 1.8
Source: Bureau of Labor Statistics
Wages are rising for skilled professionals. The demographic shortages of skilled labor and the
increasing recognition of the importance of superior human capital are leading employers to bid up the wages of superior talent. This is reflected in the increasing number of Americans who are joining the top ranks of the wage scale. According to the latest data available from the IRS, there was a significant increase in the number of tax returns filed by individuals earning more than $100,000 in adjusted gross income in 2005 (see Figure 1.9). We suspect that future releases of data will confirm that these trends have continued and will continue in the future.
FIGURE 1.9
Taxpayers Earning 1996 1999 2002 2005 %
Increase
Between $100,000-$200,000 4.61M
7.10M
8.42M
10.81M 134%
Over $200,000
1.52M
2.43M
2.41M 3.57M
135%
Source: Internal Revenue Service
There will be a significant slowdown in the educational attainment of the labor force. According to the Aspen Institute and the BLS household survey data, the percentage of the labor force over age 25 that had attained a college degree increased from 21.6% to 33.7% from 1980 to 2007. During this period, the actual number of individuals over age 25 with a college degree increased approximately 156%. It is widely expected that the percentage of the labor force with college degrees will rise at a much slower rate going forward, assuming that there are no significant changes with respect to immigration.
A change in the immigration policy could alleviate pressure, but is difficult to predict. Of course, if
labor markets in the United States become too tight in the future, our immigration policies could be altered to alleviate the pressure. However, net legal immigration is already near record highs. Also, immigration is a hot button politically. Post September 11, immigration restrictions tightened. Also, we note how difficult it was to change H-1B visa quotas during the 2001 employment peak in order to alleviate the shortage of information technology (IT) workers in the United States. Much more significant changes than those made to H-1B quotas would be needed to address the upcoming demographically driven shortages. Considering how tough those changes were to enact and the political cost (former Senator Spencer Abraham was the chief sponsor of the bill that the AFL-CIO opposed), we believe that it could be difficult to make deep changes to our immigration policy in the future.
Over the last several years, the U.S. Congress has voted against several immigration bills that have included material amendments to guest worker programs, as well as a range of border security and enforcement provisions and citizenship rights for illegal aliens currently residing in the U.S., among other issues. The rejected bills include the Secure America and Orderly Immigration Act (S. 1033; proposed May 2005), the Comprehensive Enforcement and Immigration Reform Act of 2005 (S. 1438; proposed July 2005), the Comprehensive Immigration Reform Act of 2006 (S. 2611; proposed May 2006), and most recently the Comprehensive Immigration Reform Act of 2007 (S. 1348; proposed May 2007). The bills have been rejected despite receiving bi-partisan support from key legislators and the Bush Administration making comprehensive immigration reform a top priority.
The Comprehensive Immigration Reform Act of 2007’s last vote on cloture (June 28, 2007) failed 46-53, after three votes on cloture on June 7 failed, obtaining at most only 45 votes (60 affirmative votes were required for passage). If passed, the bill would have provided legal status and a path to citizenship for roughly 12 million (some estimates are as high as 20 million) illegal aliens currently residing in the U.S., increased border security and monitoring of immigrants, and an increased number of foreigners legally allowed in the U.S. through the guest worker program. However, the number of guest workers that would have been allowed in the U.S. was gradually reduced as the bill was amended in Congress.
Given the failure of the Federal Government to pass comprehensive immigration reform, there has been significant action at the state level. According to a New York Times article citing a report by the National Conference of State Legislatures, states considered 1,404 immigration measures in 2007 (through the time the article was published on August 6) and enacted 170 of them (through August 6, 2007), reflecting two and a half times as many immigration bills considered versus 2006. During 2007 every state debated immigration issues and 41 states adopted immigration laws.
One of the most comprehensive bills at the state level came in Arizona where Governor Janet Napolitano signed the Legal Arizona Workers’ Act on July 2, which went into effect on January 1, 2008 and is applicable to employers of all sizes. Under the law, Arizona employers that knowingly hire illegal
suspension for their second offense. The Arizona law also requires Arizona employers to confirm the work eligibility of all new hires through the Federal Government’s E-Verify (formerly Basic Pilot) Program, also known as the Employment Eligibility Verification Program. Ironically, Illinois lawmakers barred the state from requiring employers to verify job applicants through the E-Verify Program, given their concerns that it may be unreliable and error prone. According to the U.S. Department of Homeland Security’s Citizenship and Immigration Services Education Branch Verification Division, the system can only handle 25 million queries at one time, while there are 52 million new hires in the U.S. each year.
Other examples of recently passed state immigration laws include a law in Tennessee that suspends business licenses for knowingly hiring illegal immigrants (similar to the Arizona law). Colorado and Oklahoma passed laws that prohibit state agencies and political subdivisions from entering into service contracts with contractors that knowingly employ illegal aliens. Georgia passed a law requiring public employers and contractors to verify employee eligibility through the Federal Government’s Basic Pilot Program. In addition to the states already mention, numerous other states have enacted legislation denying state assistance to illegal immigrants and/or barring illegal immigrants from obtaining driver’s licenses.
The Department of Homeland Security also took separate action, and announced new rules to make employers liable for submitting a letter with an incorrect social security number and then not taking the proper steps to address the discrepancy. Essentially, the DHS rule encourages the use of the Basic Pilot Program, which may be in part a response to the actions by the various states. The DHS also plans to increase the fines for companies that hire large numbers of illegal workers, including potential criminal fines.
In general, the immigration legislation shows that when the U.S. Congress fails to act on an issue that is arguably better addressed at the federal level, state legislatures and even other branches of the Federal Government will respond with their own, potentially more cumbersome and costly legislation. As in the case of the Basic Pilot Program, it also appears that the state actions may ultimately encourage the Federal Government to take action.
The HR Challenge: Employee Turnover
Cultural changes such as decreasing tenure rates mean that companies will have to replace more workers in the future. The downsizing of organizations in the early 1990s and 2000s coupled with
re-engineering and global competition has changed the attitudes of many employees with regard to company loyalty. During this decade we have seen accelerating growth combined with falling unemployment and small increases in wages. This unusual combination of strong growth with limited wage increases has made it easier for employees to rationalize switching jobs more often. This job hopping is reflected in the numbers provided by the BLS on job tenure in Figures 1.10 and 1.11 below on the next page.
FIGURE 1.10
Source: Bureau of Labor Statistics
FIGURE 1.11
Source: Bureau of Labor Statistics
As noted in Figures 1.10 and 1.11, average tenure has declined among the nation’s workers over the past 23 years. Among men aged 35-44, the average tenure has fallen to 5.1 years in 2006 from 7.3 years in 1983. Particularly interesting is the fact that tenure rates for prime workers continued to decline during the 2001 recession, though there is likely some effect attributable to the rising number of layoffs that occurred in 2001 and 2002. However, in general, we still believe the average tenure among men aged 35-44 is a key metric because it provides an apples-to-apples look at mid-career employees over the past 19 years. The statistics for individuals more than 45 years old show the same trend. Among workers aged 45-54 and 55-64, the average tenure has fallen to 9.1 from 12.8 and to 10.2 from 15.3, respectively. This decrease in employee tenure bodes well for the segments of the human capital industry which provide recruiting solutions and place executive talent.
Clearly, tenure rates are on a long-term decline. Once the labor markets rebound, what may end up being particularly disruptive to organizations is the possibility that the younger half of the work force may fail to change its job-hopping behavior significantly as it ages. In other words, those individuals who are currently 25–44 years old continue to change jobs every 3-5 years, even as they grow older and replace people in the 44-64-year-old age group (which still remembers the corporate man ethic) as they retire. Several well-regarded consultants in the HR space, including those from McKinsey, have suggested this dynamic.
Median Years of Tenure -- Overall
3.0 2.9 2.9 2.8 2.7 2.6 2.7 2.9 2.9 5.2 5.5 5.4 5.3 5.0 4.8 4.6 4.9 4.9 9.5 8.8 8.9 8.3 8.1 8.2 7.6 7.7 7.3 12.2 11.6 11.1 10.2 10.1 10.0 9.9 9.6 9.3 -5.0 10.0 15.0 20.0 25.0 30.0 35.0 1983 1987 1991 1996 1998 2000 2002 2004 2006 Ages 55-64 45-54 35-44 25-34
Median Years of Tenure -- Men
3.2 3.1 3.1 2.8 2.7 2.6 2.7 2.9 2.9 7.3 7.0 6.5 6.1 5.5 5.3 5.0 5.2 5.1 12.8 11.8 11.2 10.1 9.4 9.5 9.1 9.6 8.1 15.3 14.5 13.4 10.5 11.2 10.2 10.2 9.8 9.5 -5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 1983 1987 1991 1996 1998 2000 2002 2004 2006 Ages 55-64 45-54 35-44 25-34
Of course, the primary implication is that, in the future, companies will have to recruit more and more workers just to stay even. Imagine the implications for a company with 1,000 employees if its tenure rates declined to four years from six and two-thirds years. That company would have to increase its new hires to 250 from 150 just to stay even in one year. In order to increase its head count by 10% annually over a three-year period, this same 1,000-person company with a 25% turnover rate would have to hire approximately 1,159 new employees in order to reach a goal of 1,331 at the end of year three.
The HR Challenge: Increasing Complexity of HR
In the future, similar to the not so distant past, we believe the stress of low unemployment and high employee turnover on Corporate America’s HR departments will be significant. Another area that is arguably as challenging is the increasing administrative burden placed on HR departments. Sources of an increasing burden stem from increasing regulation, globalization, and mergers and acquisitions.
Increasing Regulatory Burden
HR is charged with complying with an ever-increasing number of new government laws, rules, and judicial rulings. The HR department within a corporation is usually responsible for compliance in the following legal areas:
• Arbitration
• Compensation policies
• Contract and temporary worker policies • Discrimination
• Drug and alcohol policies • Employee benefits
• Employee representation and unionization • Family leave
• Harassment • Hiring policies
• Hours worked and overtime • Immigration
• Insurance
• Layoffs and terminations • Maternity policies • Medical time off
• Occupational safety and health • Payroll administration • Personnel administration • Privacy policies
• Retirement planning and benefits • Suspension and probation
• Workers’ compensation insurance
While this may appear to be a long list, it is actually a summary with tens or hundreds of regulations affecting each area. In order to highlight the need to keep up with these new regulations, we have outlined a small sample of some new regulations for which HR would normally be responsible for ensuring compliance. Below we present several examples of changes in HR law that have occurred as a result of new legislation or legal rulings that have occurred in the last year:
There have been several employment-related risks that have increased significantly in recent years. One potentially costly claim that has become increasingly common is retaliation claims. Title VII of the Civil Rights Act of 1964 forbids employment discrimination against any individual based on that individual’s “race, color, religion, sex, or national origin.” A separate section of the Act covers Retaliation claims by employers.
Retaliation claims entail an employee filing a claim under the belief that they were fired, demoted, harassed, or otherwise “retaliated” against for filing a charge of discrimination, participating in a discrimination proceeding, or otherwise opposing discrimination. Retaliation claims are currently the third most common type of discrimination claim behind only race and sex claims, accounting for roughly 30% of all discrimination claims, up from 16% in 1993 (EEOC).
There were several claims during 2006 that highlight just how expensive retaliation claims can be for an employer. For example, a California jury awarded $18 million to James Stevens, an African American male that had been sexually harassed by a coworker and then been fired as a result of the situation, and a New York city jury awarded $16 million to Kimberly Osorio, the former Editor-in-Chief of The Source after she was retaliated against for filing a gender discrimination claim.
The retaliation provision of Title VII was recently challenged on several fronts by a U.S. Supreme Court ruling in Burlington Northern and Santa Fe Railway Company v. Sheila White. The Supreme Court set the precedent that an employer can be held liable for causing harm to an employee outside of the workplace through retaliatory practices. The court also found that just because an employee receives back pay for a suspension does not mean that the individual has been made whole. In the case of Burlington Northern v. White, the court ruled that since the employee had to live during the suspension period without income and did not know if or when they would be allowed to return to work, they endured an additional hardship, and were entitled to both compensatory and punitive damages. While it clarifies several issues with regards to retaliation claims, the White case leaves the question of “material adversity” (deciding whether or not the retaliatory actions had a material negative impact on the employee) to the jury.
In a presentation at the 2007 SHRM Annual Conference, Mary E. Pivec, a partner in the employment practice at Keller and Heckman LLP, presented several retaliation risk management recommendations. They include: ensuring that discrimination and harassment policies prohibit retaliation; providing a hotline for reporting EEO, harassment and retaliation claims; investing in ongoing interactive/behavioral harassment and retaliation training for supervisors and managers; establishing EEO investigative procedures and addressing retaliation complaints promptly and credibly; making EEO management performance a factor in compensation and promotion; monitoring complaintants’ work areas for signs of retaliation and intervening promptly when it occurs to correct it; auditing past incidents for lessons learned; and, considering adopting a pre-dispute arbitration policy.
In addition to some resolution being brought over the past year regarding retaliation law, Sarbanes-Oxley whistleblower statutes continue to be more clearly defined. Effectively the scope of Sarbanes-Oxley whistleblower cases have been narrowed to cases where employee communication “definitely and specifically” relates to fraud or securities violations, while generalized complaints about how the company runs its business are not protected. Additionally, the alleged fraud must be of the type to adversely impact shareholders’ interests and the amount of potential loss must be significant and material to reasonable shareholders.
Another notable change in employment law came in the U.S. Supreme Court decision in Ledbetter v. Goodyear regarding claims of pay discrimination. Under Ledbetter, in order to receive restitution for pay discrimination, employees must assert wage discrimination claims within 180 days of the alleged discriminatory wage being set. Furthermore, the court ruled that the claim must be filed within 180 days of the original instance of pay discrimination and noted that “a new violation does not occur, and a new charging period does not commence, upon the occurrence of subsequent non-discriminatory acts that entail adverse effects resulting from the past discrimination.” While the Ledbetter decision provides employers a means to defend themselves against untimely-filed pay discrimination claims (given the change relative to the previous legislation), the relief may be only temporary with several senators suggesting that they plan to introduce legislation to amend Title VII to give workers more time to file a complaint.
In addition, numerous laws and regulations already in existence are often subject to new rulings or interpretations. One example is the Family and Medical Leave Act, which has been the subject of multiple court rulings with varying interpretations.
Strict compliance with these ever-changing rules, regulations, and judicial interpretations is important because of the potential for material court rulings against companies for not closely following the rules. There have been thousands of individual rulings with relatively high negative consequences for companies. More significant is the potential for class-action suits. Not only are these suits expensive, they usually limit the operating flexibility of the company after the suits are settled.
Another key piece of legislation that was recently passed and is having a drastic impact on companies from an HR perspective is the Pension Protection Act of 2006. The Pension Protection Act of 2006 establishes new funding and disclosure rules for pension plans, representing the most meaningful pension legislation in the U.S. in roughly 30 years (since ERISA).
Globalization
Multinational companies have been expanding globally much more so than they did ten years ago. In our opinion, this is a trend that will likely continue. The majority of activity to date has been U.S. and Western European-based companies expanding abroad in order to increase their customer base and capitalize on untapped resources. The U.S. and Western European companies have been focusing heavily on expanding in to China, India and Eastern Europe. Recently, multinational companies based abroad in areas such as China are beginning to expand globally as well. The continued expansion of companies overseas poses significant challenges to the HCM function. Various issues from regulation to compensation, to organizational structure and management, are complicated by an increasing international presence, which also increases the burden of the HCM function. As a result, multinational companies are increasingly looking for products with the technology to support global operations as well as service providers with geographic footprints large enough to meet their global demands.
Mergers, Acquisitions, and Restructurings
Probably the most challenging corporate events for the HCM function to deal with are mergers, acquisitions, and restructurings. Head count, organizational structure, integration of systems and personnel, rationalization of duplicate facilities and functions, and the meshing of corporate cultures are all incredibly difficult issues. Over the past several years, the influx of money into private equity funds as well as generally loose credit markets has boosted the level of mergers and acquisitions. To the extent that the number of these events continues to increase, this too would place an increasing burden on the HCM function.
The HR Challenge--Budgetary Constraints
While more effective HCM is likely to become a key corporate issue during this decade, the HR function within an organization is likely to face increasing cost constraints. In large part, we believe that this is due to the failure of many HR departments to establish themselves as true business partners offering strategic added value. As a result, many HR departments are viewed as cost centers with limited ability to enhance corporate performance. These cost pressures have put extra stress on HR departments thereby exacerbating the current HR challenge; however, it was not always this way. HR and HCM in previous decades used to be much simpler.
Evolution of the HCM Function--Baby Steps until Now
The HCM function has evolved from the early days of the industrial revolution to the present. This evolution is typified by increased complexity and regulation, as well as a rapid pace of technological change. Highlights of this evolution follow.
The late 1800s to 1930s. The industrial revolution spawned giant manufacturing complexes that replaced
the small business, cottage industry model that had been the focal point of commerce during previous centuries. As the giant oil, electrical, and railroad companies grew, they spawned the first staffing departments, one of the first of which was the personnel department. The personnel department was formed to recruit and pay thousands of people to work the new machines of the new age. The industrialists of the age focused on new ways of manufacturing therefore the human capital of the organizations was not highly valued. Employees were treated as if they were production parts, and those in the personnel department were treated as if they were inventory clerks. This system stayed largely in place through the end of World War II.
The 1940s and 1950s. The personnel function within organizations began to develop into more than just
an offshoot of payroll. More sophisticated compensation and training technologies were developed. Personnel remained a reactive service and labor was considered an adversary to management.
The 1960s. Government intervention through passage of the Civil Rights Act, ERISA, American
Disabilities Act, and OSHA forced companies to place responsibility on personnel departments to meet new government requirements.
The 1970s. Baby boomers moved into the workforce, demanding meaning and satisfaction from their
jobs. New laws required organizations to provide welfare benefits and social activities in addition to employment. The first large-scale, automated HR information systems (HRIS) were deployed.
The 1980s. Personnel departments became involved in designing new pay plans, training, and
organizational development interventions. “Personnel” became “HR,” a factor in the management of large, complex organizations, focused on running internal programs. Following painful layoffs during the 1980-81 recession, HR led the drive to use staffing companies strategically to build flexibility into a company’s workforce.
The 1990s. Organizations began to turn to their HR departments for help in running their businesses.
There was more recognition that HR was a truly critical variable. HR directors began to transform their departments into business partners, establishing partnerships with their internal customers and developing the ability to track the effect of their work on the outcomes of internal customers. HRIS systems became more sophisticated and valuable; they moved from the data processing department to the HR department. Sophisticated HR departments began to outsource non-core processes to dedicated resources in order to focus on more strategically important functions.
Overall, the HCM function has evolved significantly with the key areas of evolution including the following: (1) human capital has replaced plant, property, and equipment as an organization’s most critical asset, (2) the death of the “organization” man, (3) the development of sophisticated HRIS packages, (4) the growing acceptance of outsourcing business processes, and (5) the increasing scope of responsibilities that fall under the auspices of HCM. While these changes have been material, the level of sophistication and progress that HCM has achieved falls far behind the evolution that has transformed other corporate activities such as inventory management, manufacturing, distribution, marketing, and finance.
HCM in the 21st Century
We believe that the escalating war for talent as well as other elements of the HR challenge will require successful companies to improve the efficiency and cost effectiveness of their HCM functions. Metrics are increasingly being adopted by organizations that pinpoint many areas for improvement. While precise data is difficult to obtain, many studies suggest that large companies spend between $800 and $2,000 per employee per year for HR administration. As outlined in Figure 1.12, we estimate that a company that operates at the 25th percentile in terms of efficiency incurs HR administration costs of approximately $125 million for 50,000 employees; fa company operating at the 75th percentile of efficiency incurs HR administration costs of approximately $40 million. As a result, by improving its efficiency level, organization with 50,000 people could potentially generate $85 million in annual savings.