THE SEARCH FOR TALENT
Oct 5th 2006
From The Economist print edition
The world’s most valuable commodity is getting harder to find

There is intense competition at the moment to hire the most talented and most intellectually able people … We have a shortage of talent both within countries and between countries, and there is an intense battle between companies trying to hire the most talented workers and also between countries which are looking to recruit

These are heady days for most companies. Profits are up. Capital is footloose and fancy-free. Trade unions are getting weaker. India and China are adding billions of new cheap workers and consumers to the world economy. This week the Dow Jones Industrial Average hit a new high.

But talk to bosses and you discover a gnawing worry-about the supply of talent. “Talent” is one of those irritating words that has been hijacked by management gurus. It used to mean innate ability, but in modern business it has become a synonym for brainpower (both natural and trained) and especially the ability to think creatively. That may sound waffly; but look around the business world and two things stand out: the modern economy places an enormous premium on brainpower; and there is not enough to go round.

The best evidence of a “talent shortage” can be seen in high-tech firms. The likes of Yahoo! and Microsoft are battling for the world’s best computer scientists. Google, founded by two brainboxes, uses billboards bearing a mathematical problem: solve it for the telephone number to call. And once you have been lured in, they fight like hell to keep you: hence the growing number of Silicon Valley lawsuits.
    
As our survey this week shows, such worries are common in just about every business nowadays. Companies of all sorts are taking longer to fill jobs-and say they are having to make do with sub-standard employees. Ever more money is being thrown at the problem-last year 2,300 firms adopted some form of talent-management technology-and the status and size of human-resource departments have risen accordingly. These days Goldman Sachs has a “university”, McKinsey has a “people committee” and Singapore’s Ministry of Manpower has an international talent division.

Trespassers will be recruited

Some of this panic is overdone-and linked to the business cycle: there was much ado about “a war for talent” in America in the 1990s, until the dotcom bubble burst. People often talk about shortages when they should really be discussing price. Eventually, supply will rise to meet demand and the market will adjust. But, while you wait, your firm might go bust. For the evidence is that the talent shortage is likely to get worse.
Nobody really disputes the idea that the demand for talent-intensive skills is rising. The value of “intangible” assets-everything from skilled workers to patents to know-how-has ballooned from 20% of the value of companies in the S&P 500 to 70% today. The proportion of American workers doing jobs that call for complex skills has grown three times as fast as employment in general. As other economies move in the same direction, the global demand is rising quickly.

As for supply, the picture in much of the developed world is haunted by demography. By 2025 the number of people aged 15-64 is projected to fall by 7% in Germany, 9% in Italy and 14% in Japan. Even in still growing America, the imminent retirement of the baby-boomers means that companies will lose large numbers of experienced workers in a short space of time (by one count half the top people at America’s 500 leading companies will go in the next five years). Meanwhile, two things are making it much harder for companies to adjust.

The first is the collapse of loyalty. Companies happily chopped out layers of managers during the 1990s; now people are likely to repay them by moving to the highest bidder. The second is the mismatch between what schools are producing and what companies need. In most Western countries schools are churning out too few scientists and engineers-and far too many people who lack the skills to work in a modern economy (that’s why there are talent shortages at the top alongside structural unemployment for the low-skilled).

What about all those billions of people in the developing world? Alas, adding willing hands to the global economy is not the same as adding trained brains. Both India and China are suffering from acute skills shortages at the more sophisticated end of their economies. Wage inflation in Bangalore is close to 20%, and job turnover is double that (”Trespassers will be recruited” reads a sign in one office). The few elite institutions, such as India’s Institutes of Technology, cannot meet demand. And there are also cultural legacies to deal with: India’s Licence Raj destroyed management skills, while China’s Confucian tradition still emphasises “face” over innovation.

A problem for all of us

This poses different challenges for companies, governments and individuals. For companies the main task is simply to end up with more talented people than their competitors. Firms will surely have to cast their net wider, employing more part-time workers and more older workers, and spending yet more on training, even in places where workers seem cheap: the training budget at Infosys, an Indian tech giant, is now well above $100m. Human-resource managers, once second-tier figures, now often rank among the highest-paid people at American firms; they will have to justify that status.
But governments too need to act. Removing barriers is a priority: even America still rations the number of highly skilled immigrants it lets in, and Japan and many European countries do far worse. But education inevitably matters most. How can India talk about its IT economy lifting the country out of poverty when 40% of its population cannot read? As for the richer world, it is hard to say which throw more talent away-America’s dire public schools or Europe’s dire universities. Both suffer from too little competition and what George Bush has called “the soft bigotry of low expectations”.

And the talented would do well to intervene in this debate on the side of the disadvantaged. For one last thing is sure to flow from the hunt for talent: even greater inequality. Most societies will tolerate the idea of well-rewarded winners, as long as there is equality of opportunity and the losers also clearly gain something from the system. If those conditions are not met, populist politicians from Toledo to Tokyo will clamp down-and everyone will be poorer for it. A global meritocracy is in all our interests. Be prepared to fight for it.

Talent has become the world’s most sought-after commodity, says Adrian Wooldridge. The shortage is causing serious problems
 
In a speech at Harvard University in 1943 Winston Churchill observed that “the empires of the future will be empires of the mind.” He might have added that the battles of the future will be battles for talent. To be sure, the old battles for natural resources are still with us. But they are being supplemented by new ones for talent-not just among companies (which are competing for “human resources”) but also among countries (which fret about the “balance of brains” as well as the “balance of power”).

The war for talent is at its fiercest in high-tech industries. The arrival of an aggressive new superpower-Google-has made it bloodier still. The company has assembled a formidable hiring machine to help it find the people it needs. It has also experimented with clever new recruiting tools, such as billboards featuring complicated mathematical problems. Other tech giants have responded by supercharging their own talent machines (Yahoo! has hired a constellation of academic stars) and suing people who suddenly leave.
 
But a large and growing number of businesses outside the tech industry-from consulting to hedge funds-also run on brainpower. When the Corporate Executive Board (CEB), a provider of business research and executive education based in Washington, DC, recently conducted an international poll of senior human-resources managers, three-quarters of them said that “attracting and retaining” talent was their number one priority. Some 62% worried about company-wide talent shortages (see chart 1). The CEB also surveyed some 4,000 hiring managers in more than 30 companies, and was told that the average quality of candidates had declined by 10% since 2004 and the average time to fill a vacancy had increased from 37 days to 51 days. More than one-third of the managers said that they had hired below-average candidates “just to fill a position quickly”. The CEB found, too, that about one in three employees had recently been approached by another firm hoping to lure them away.

Can’t get enough of it

All this brings back memories of the dotcom boom in the late 1990s, when management consultants were writing books such as “The War for Talent” (by Ed Michaels, Helen Handfield-Jones and Beth Axelrod of McKinsey), telling companies that they must move heaven and earth to recruit and promote the best talent. No sooner had the bubble burst than many former masters of the universe were begging for work.

Indeed, companies do not even know how to define “talent”, let alone how to manage it. Some use it to mean people like Aldous Huxley’s alphas in “Brave New World”-those at the top of the bell curve. Others employ it as a synonym for the entire workforce, a definition so broad as to be meaningless.
Nor does stocking up on talent seem to protect companies from getting it spectacularly wrong. Enron did everything that Mr Michaels and his colleagues recommended (indeed, McKinsey was both a consultant and a cheerleader for the Houston conglomerate). It recruited the best and the brightest, hiring up to 250 MBAs a year at the height of its fame. It applied a “rank-and-yank” system of evaluation, showering the alphas with gold and sacking the gammas. And it promoted talent much faster than experience. Another corporate disaster, Long-Term Capital Management, was even more talent-heavy than Enron, boasting not only MBAs but Nobel prizewinners among its staff. But despite all this talent, the companies still succumbed to greed and mismanagement.

The coming shortage

Clearly there is more to good management than hiring the best and the brightest. Among other things, it requires rewarding experience as well as talent, and applying strong ethical codes and internal controls. Indeed, talent-intensive businesses have a particular interest in maintaining high ethical standards. Whereas in manufacturing industries a decline in such standards is often slow, in talent-intensive ones it can be terrifyingly sudden, as Arthur Andersen and Enron found to their cost.

All the same, structural changes are making talent ever more important. The deepest such change is the rise of intangible but talent-intensive assets. Baruch Lev, a professor of accounting at New York University, argues that “intangible assets”-ranging from a skilled workforce to patents to know-how-account for more than half of the market capitalisation of America’s public companies. Accenture, a management consultancy, calculates that intangible assets have shot up from 20% of the value of companies in the S&P 500 in 1980 to around 70% today.

McKinsey makes a similar point in a different way. The consultancy has divided American jobs into three categories: “transformational” (extracting raw materials or converting them into finished goods), “transactional” (interactions that can easily be scripted or automated) and “tacit” (complex interactions requiring a high level of judgment). The company argues that over the past six years the number of American jobs that emphasise “tacit interactions” has grown two and a half times as fast as the number of transactional jobs and three times as fast as employment in general. These jobs now make up some 40% of the American labour market and account for 70% of the jobs created since 1998. And the same sort of thing is bound to happen in developing countries as they get richer.

A second change is the aging of the population. This will be most dramatic in Europe and Japan: by 2025 the number of people aged 15-64 is projected to fall by 7% in Germany, 9% in Italy and 14% in Japan. But it will also make a difference to China, thanks to its one-child policy. And even in America, where the effect will be less marked, the retirement of the baby-boomers (which has just started) means that companies will lose large numbers of experienced workers over a short period. RHR International, a consultancy, claims that America’s 500 biggest companies will lose half their senior managers in the next five years or so, when the next generation of potential leaders has already been decimated by the re-engineering and downsizing of the past few decades. At the top of the civil service the attrition rate will be even higher. This means that everyone will have to fight harder for young talent, as well as learning to tap (and manage) new sources of talent.

At the same time loyalty to employers is fading. Thanks to all that downsizing, the old social contract-job security in return for commitment-has been breaking down, first in America and then in other countries. A 2003 survey by the Society for Human-Resource Management suggested that 83% of workers were “extremely” or “somewhat” likely to search for a new job when the economy recovered.

As well as becoming more footloose, the workforce is becoming less standardised. Today employees come in all shapes and sizes. Some 16% of American workers telecommute some of the time. A quarter of the staff at B&Q, a British DIY chain, are over 50; the oldest is 91. And these diverse workers are often part of a global supply chain that keeps going 24 hours a day. Managers not only need to deal with lots of different sorts of people, but also to manage workers in different countries and often across different functions. That means even more competition for people with up-to-date management skills.

Obsession with talent is no longer confined to blue-chip companies such as Goldman Sachs and General Electric. It can be found everywhere in the corporate world, from credit-card companies to hotel chains to the retail trade. Many firms reckon that they have pushed re-engineering and automation as hard as they can. Now they must raise productivity by managing talent better.

With opportunities at home running dry, the hunt for talent has gone global. Over the past decade multinational companies have shipped back-office and IT operations to the developing world, particularly India and China. More recently they have started moving better jobs offshore as well, capitalising on high-grade workers with local knowledge; but now they are bumping up against talent shortages in the developing world too.

Even governments have got the talent bug. Rich countries have progressed from simply relaxing their immigration laws to actively luring highly qualified people. Most of them are using their universities as magnets for talent. India and China are trying to entice back some of their brightest people from abroad. Singapore’s Ministry of Manpower even has an international talent division.

The dark side

Competition for talent offers many benefits-from boosting productivity to increasing opportunities, from promoting job satisfaction to supercharging scientific advances. The more countries and companies compete for talent, the better the chances that geniuses will be raked up from obscurity.
But the subject is strewn with landmines. Think of the furore that greeted Charles Murray’s and Richard Herrnstein’s book “The Bell Curve”, which argued that there are differences in the average intelligence of different racial groups; or the ejection of Lawrence Summers as president of Harvard University because he had speculated publicly about why there are so few women in the upper ranks of science.
It would be wonderful if talent were distributed equally across races, classes and genders. But what if a free market shows it not to be, raising all sorts of political problems? And what happens to talented Western workers when they have to compete with millions of clever Indians who are willing to do the job for a small fraction of the price?

This survey will argue that the talent war has to be taken seriously. It will try to avoid defining talent either too broadly or too narrowly but simply take it to mean brainpower-the ability to solve complex problems or invent new solutions. It will thus focus on what Peter Drucker, the late and great management guru, called “knowledge workers”. But there is no point in being dogmatic. The nature of critical talent varies from company to company: it may be the ability to crack a few jokes while turning an aeroplane around in 25 minutes, as demonstrated by Southwest Airlines. It is one of the marks of a sophisticated society that it rewards a wide variety of different talents.
    
The survey will conclude by looking at the widening inequalities that will result from the competition for talent, and weighing up the risks of a backlash against the talent elite.

Companies of all stripes have become aware of the need to gather talent

There is nothing new about companies wanting to secure the best talent. The East India Company, founded in 1600, used competitive examinations to recruit alpha minds. The company’s employees included James and John Stuart Mill, two of Britain’s greatest intellectuals, and Thomas Love Peacock, one of its wittier writers. General Electric (GE) carefully ranks its employees, with the best groomed for leading positions and the weakest eased out. In the mid-1950s it launched its corporate university at Crotonville near New York, often dubbed Harvard-on-the-Hudson. Jack Welch, the company’s legendary boss, spent half his time on “people development” and visited Crotonville every two weeks. As for investment banks and consultancies, they have to be obsessive about talent: what else are they selling?
But now something new is in the air. Thanks to a hyper-competitive labour market, professional-service firms have become more preoccupied with talent than ever; and even companies in more mundane businesses have begun to think that they cannot manage without it.

The 1990s were a time of galloping growth for professional-service firms. Jay Lorsch, of Harvard Business School, and Thomas Tierney, head of the Bridgespan Group, have produced some striking figures, showing that global revenue across the industry leapt from $390 billion in 1990 to $911 billion in 2000. Companies became both much bigger and much more global: by 2000 PricewaterhouseCoopers had over 9,000 partners, and McKinsey had 81 offices worldwide. There was a frenzy of mergers and acquisitions: America alone saw 7,638 of them in 1995-2000, worth a total of $471 billion. And lots of newcomers entered the market in the 1990s-2,300 advertising firms, 2,600 accounting firms and nearly 50,000 freelance consultants. This rapid growth faltered a bit when the dotcom bubble burst, but is now resuming.
Headlong expansion has created serious problems for professional-service firms. They have to work harder to woo potential recruits, particularly potential stars, not just from each other but also from high-tech companies. And they have to turn their recruits into company men in double-quick time. This has led them to pay even more attention to talent.
Goldman Sachs, for example, underwent a wide-ranging internal review in 1999, complete with benchmarking against industry leaders. It increased its emphasis on formal training, setting up a Goldman Sachs University, and encouraged senior partners to put more effort into developing talent. McKinsey’s People Committee has spent the past two years fine-tuning its talent machine. It has boosted its training budget to $100m, diversified its sources of recruitment and rejigged its internal organisation to appeal to well-qualified young people.

The triumph of the HR department

Managing talent has become more important to a much wider range of companies than it used to be. One result has been that human-resources departments, which used to be quiet backwaters, have gained in status. A survey by Aon, a consultancy, identified 172 HR executives who were among the five best-paid managers in their companies. That would have been unheard of a few years ago. The biggest earners among them worked for some surprising companies, such as Black & Decker, Home Depot, Pulte Homes, Viacom and Timberland. Companies are also trying to give their people-managers better tools. The Yankee Group estimates that last year over 2,300 companies worldwide adopted some form of talent-management technology and predicts that the market for such technology will nearly double by 2009.

Talent-intensive companies have provided both a model and a training school for the corporate world. GE is America’s CEO factory: when Mr Welch chose Jeffrey Immelt to succeed him in 2001, two of his disappointed rivals, Bob Nardelli and Jim McNerney, were immediately snapped up by Home Depot and 3M respectively. It is also an inspiration: there are now 1,600 corporate universities loosely modelled on Crotonville. Consultancies and investment banks have become finishing schools for future corporate leaders: Lou Gerstner at IBM, Ken Chenault at American Express, Meg Whitman at eBay and Chuck Conaway at K-Mart all started out in consultancies (as do 65% of the products of top business schools).

Capital One, a credit-card company, shows what a difference the application of talent can make to a sleepy market. The company’s headquarters, in McLean, Virginia, looks more like a consultancy than a bank. The atmosphere is informal. The staff is young and “data-centric”. The formula seems to work: founded in 1995, Capital One is now number four in the American credit-card market. Last year it doubled its number of employees to 20,000.

The company’s success is due to the deployment of lots of brainpower in a business generally seen as unexciting. The founders, Rich Fairbank and Nigel Morris, were both products of MBA programmes and consultancies. They decided that they could use mass customisation to compete with financial giants such as American Express, recruited a high-powered team of former consultants and used sophisticated statistical techniques to slice the credit-card market into tiny segments.

To-do list

Companies are now beginning to gain insights into managing talent that should allow them to tackle the problem in a more organised way. The first rule is to think more carefully about their critical talent. Deloitte, a consultancy, offers a useful example of how UPS reduced the turnover rate among the people who drive its trucks and deliver its packages. Big Brown had found that even though it selected its drivers with great care, turnover was uncomfortably high, mainly because drivers hated the back-breaking work of loading the trucks in the morning. So the company contracted out this job to part-timers who are much easier to find than drivers.

Second, it is essential to plan ahead. EDS, a giant technology company, has built a global skills inventory of its 100,000-strong workforce. The company compared the workforce’s current skills with its future needs and set about filling the gaps by encouraging workers to acquire the relevant skills. Schlumberger, a Franco-American oil-services group, is preparing for an expected skills shortage in the next few years by asking its managers to cultivate successors, and holding rigorous inquests when a high-flyer jumps ship.
Third, companies need to be more imaginative about recruiting and retaining talent. That includes paying more attention to “passive candidates”-those who are not actively looking for a job but might be open to seduction (see chart 2). Popular techniques include going through lists of people attending conferences in order to buttonhole stars, buying information about competing firms (including names of key workers) and searching the web for people who have created new patents.
 
High attrition rates in the first few months have also persuaded companies to pay more attention to keeping new recruits on board. In the late 1990s American Express found that far too many of its new managers were leaving within the first two years. It now gives them a chance to work on projects that are overseen by the CEO, as well as providing them with “assimilation coaches”. Companies are also cultivating relations with former alumni. Ernst & Young, a consultancy, fills about a quarter of its vacancies from this source.

The fourth rule is to create internal markets for talent. Many HR departments instinctively look outside. Deloitte calculates that the typical American company spends nearly 50 times more to recruit a professional on $100,000 than it spends on his or her further training every year. Moreover, new recruits can take more than a year to learn a job. One solution is to establish an internal market, encouraging workers to apply for jobs across the company. Schlumberger encourages its employees to post detailed CVs on the company intranet; McKinsey allows consultants from all over the world to apply for any project within the company.

One difficulty with implementing these ideas is that there is no consensus about who is responsible for managing talent. If the CEO is in charge, he may well be distracted by too many other responsibilities; if it is the head of HR, he may lack the institutional heft to get much done.

Herding cats

Nor, indeed, is there a consensus on the best way to manage talent. Part of the problem is that HR as a discipline has not achieved anything like the level of sophistication of, say, finance. But more importantly, the more valuable the talent, the more difficult it is to manage. In business, as everywhere else, world-class talent sometimes comes in unexpected guises. Ray Kroc sold milkshake machines to restaurants before starting to build McDonald’s at the age of 52. David Ogilvy was a chef, a farmer and a spy before becoming an advertising genius.

And solutions that have proved successful in one place do not necessarily work in another. On arriving at Home Depot in 2000, Mr Nardelli was determined to apply the lessons he had learned at GE to reinvigorate the DIY giant. He appointed a colleague from GE, Dennis Donovan, to run the HR side, and boosted his credentials by paying him the second-highest salary in the company. He replaced the company’s ad hoc talent-management system with a much more formal one, creating a leadership development institute, employing more human-resource managers and imposing an elaborate system of performance measurement. But the results have been mixed. Home Depot’s share price is now somewhat lower than it was when Mr Nardelli took over. Wal-Mart and Lowe’s are providing stiff competition. And there is widespread disgruntlement about Mr Nardelli’s giant pay package. Demoralised employees have taken to calling the company “Home Despot”.
    
Still, Mr Nardelli’s record is unlikely to discourage other companies from trying to find ways to get on top of the problem. They are motivated by a powerful combination of fear and hope: fear of talent shortages and hope that they can be turned into a source of competitive advantage. Those hopes often involve shopping for talent in the developing world.