Talent Management: The ROI of Best-in-Class Talent Management
Achieving excellence in talent management, by developing best-in-class internal systems or managing the outsourcing relationship with a service provider effectively, netted the average Fortune 500 company nearly a 15 percent improvement in earnings before interest, taxes, depreciation and amortization (EBITDA), which amounts to almost $400 million annually, according to new research from the Hackett Group, a strategic advisory firm.
Hackett's research demonstrates the bottom-line impact of managing human assets effectively, and it provides strong evidence of the value of developing intangible assets such as a company's workforce. The research provides HR organizations with a new way to demonstrate the effect of their efforts on productivity, customer satisfaction and employee commitment, and, by extension, on sales, profits and shareholder value.
"Certainly it makes intuitive sense that attracting, developing and retaining a talented workforce can enhance a company's performance. But, like many areas of HR, it's been exceptionally difficult to measure the real impact of improvements," says Hackett Chief Research Officer Michel Janssen. "Achieving excellence in talent management is not something that happens overnight, since changing how a company strategically addresses talent takes time and often requires a real cultural shift."
According to Hackett Managing Director Stephen Joyce, "The best companies treat employees the same way they treat their business lines, as something to be carefully analyzed and strategically developed in support of their business goals." They:
- Determine the skills, competencies and experiences needed to run their company over the next few years.
- Quantify the gap between their needs and their current resources.
- Acquire the expertise they need through a combination of staff development and hiring.
As a result, Joyce says, they are more competitive in the marketplace, "and this is reflected in improved earnings."
Outsourcing talent management is one way for organizations to pursue best-in-class solutions when managing talent isn't among their core competencies. But "I see very few organizations that are outsourcing talent management from a holistic standpoint," Joyce says. "What is more likely in organizations is outsourcing components of talent management, such as recruiting, or outsourcing systems related to tracking skills and competencies, such as performance-management systems, or outsourcing training and development."
The danger, Joyce notes, is a splintered approach that makes it more difficult to gauge the overall effectiveness of an organization's talent management efforts.
One of the key issues for HR managers outsourcing talent management, as with other HR operations, is to ensure that they have "a clearly defined set of requirements for their vendors, and that they are managing the relationship and the time frames to meet the needs of the organization," Joyce points out.
"What's very clear is that service-level agreements are important," he adds. "Start with why you are outsourcing, what you're trying to accomplish. We find many organizations outsource for cost reasons only, but, by the time the work is shifted, there are expectations around quality and timeliness that were not defined at the beginning of the relationship."
He advises, "Resolve upfront with the vendor your expectations," especially with regard to response time and the specific quality metrics that will be used to evaluate received services (for example, quality of hire).
Hackett's research found a strong correlation between improved financial performance and top-quartile performance in four key talent management areas:
- Strategic workforce planning, which involves identifying the skills critical to a company's operation and how those needs match up against those of the existing workforce.
- Staffing services, including recruitment, staffing and exit management.
- Workforce development services such as training and career planning.
- Overall organizational effectiveness, including labor and employee relations, performance management and organizational design and measurement.
Companies with top-quartile talent management outperformed impressively across four standard financial metrics:
- EBITDA of 16.2 percent vs. 14.1 percent for typical companies. This gap netted a typical Fortune 500 company (based on $19 billion revenue) an additional $399 million annually.
- Net profit margin up, on average, $247 million annually via a 22 percent improvement.
- Return on assets up $992 million annually through a 49 percent improvement.
- Return on equity up $340 million annually via 27 percent improvement.
Top performers in talent management are also:
- 57 percent more likely than their peers to have a formal HR strategic plan in place.
- More than twice as likely to facilitate strategic workforce planning discussions with senior management.
- 50 percent more likely to link their learning and development strategy to their company's strategic plan
Top performers in talent management operate very differently from their peers, Joyce says. "They spend 6 percent less on HR overall than typical companies, driven by dramatically lower costs in key areas such as total rewards administration, payroll and data management, and also lower employee lifecycle costs. These savings enable them to invest more in talent management processes," whether handled internally or outsourced.