Making People Decisions in the New Global Environment

Economic power has been shifting at an unprecedented pace from the United States and Western Europe to a host of emerging countries. A recent forecast from Goldman Sachs Group Inc. predicts that in just 20 years or so, the gross domestic product of China could be larger than that of the United States. Together China, Russia and India have amassed almost $2 trillion in foreign currency reserves, and local companies from Southeast Asia, India, China, Russia and the Gulf countries have been buying industrial assets all over the world. In the past, these emerging countries relied on cheap labor to compete at the bottom of the pyramid. Not any longer. Their competitiveness is already reaching the high end, including knowledge-intensive sectors like biotechnology and information sciences.

A Changing Landscape

Senior executives around the world haven’t been blind to the changing landscape. My colleagues and I recently conducted a major global study with the CEOs of 50 of the world’s largest multinational corporations, which together employ more than three million people and have a combined market capitalization approaching $2 trillion. These companies are fully aware of the dramatic global changes that are occurring and are aggressively planning to intensify their presence in developing regions. In particular, they recognize that Brazil, Russia, India and China (the so-called BRIC countries) represent not only a growing market of almost two billion people but also a source of inexpensive labor and cheap brains.

Accordingly, the multinational companies in our study have been planning to increase the percentage of their talent outside their original headquarters region substantially over the next five years. Moreover, CEOs of these companies have been heavily involved in senior talent management issues (including recruitment, development and retention), spending up to 40% of their time on such tasks. Even so, the unfortunate truth is that many companies are still woefully ill-prepared to handle senior talent issues in the new global environment. There are three reasons why: widespread ignorance about how much (and how fast) things are changing, a number of unprecedented challenges for people decisions, and existing talent practices that are far from adequate.

Widespread Ignorance

Although executives are generally knowledgeable about changes in global competitiveness, many are ignorant about specific markets. For example, an international study by BT Group PLC found that 55% of Western business executives didn’t even know that the Indian currency is the rupee. Many executives are likewise unaware about the huge investments in communication technologies in India that, combined with its intellectual capital, make it not only a cheap place to outsource work but also a source of extremely powerful research for the entire world.

I recently had the personal experience of out-sourcing to India a huge piece of extremely complex research. The project required access to proprietary and public databases as well as careful investigation and judgment about the career histories and backgrounds of thousands of individuals. After describing the work to a few Western colleagues, I asked them for their estimates about the costs of conducting that research in India. The lowest estimate was 200% greater than the actual cost, and the highest estimates were 2,000% greater and upwards!

Indeed, many executives in the United States and Western Europe don’t realize that sophisticated brains in India are incredibly cheap and productive, providing a fast and economical means of performing work requiring substantial intellectual capabilities. As Arun Seth, chairman of BT India, asserts, “Indian businesses have shown remarkable agility and speed at adopting new collaborative tools and technologies quicker, in many cases, than in the U.S. or Europe. Western organizations need to start collaborating in and with BRIC businesses or be left behind.”

Unprecedented Challenges

People decisions in the new competitive global environment are presenting a number of unprecedented challenges. To start with, some sectors are growing at mind-boggling rates: The five-year compound annual growth rate in China has been 19% for telecommunications, 26% for automotives and 31% for electrical products and electronics. As a result, whereas in 2003 there were only eight Chinese companies within the Fortune Global 500, in 2006 there were 20. Not surprisingly, the breakneck growth and increasing complexity of these companies has generated a tremendous demand for talent, and businesses are finding it extremely difficult to find qualified professionals in these new markets.

In China, which had no business schools until the mid-1990s, the demand for managerial talent is pressing on a very thin pool that includes a scarce yet complex mix of Western expatriates, Asian expatriates, mainland Chinese returnees (called “sea turtles” and “sea weeds”) and mainland Chinese locals. Consequently, compensation levels for senior positions are already very similar to those in the most developed countries. The market in India is also facing the problem of shrinking talent pools to support its breakneck growth. Search candidates are blessed with an all-time-high level of demand, with frequent stories of individuals with three and even four job offers.

And the difficulties don’t cease once someone is hired. The “stick rate” of hired candidates in Asia has become lower than that for the United State and Europe, regardless of past traditions of lifetime employment and worker loyalty. And despite the large need for diversity, integrating foreigners has never been easy. My colleagues from Japan recently conducted a study on talent management at Japanese companies that have been reaccelerating their overseas expansion through organic growth and acquisitions. They found that many nonJapanese executives end up leaving, often because of a mismatch with the management culture, disappointment with the leadership and frustration with the local business’s relationship with headquarters.

As if that weren’t enough, another huge challenge is the increased difference in values between employees in the most developed countries versus those in the emerging ones. The former tend to prioritize work-life balance, while the latter generally emphasize work and professional success. And to exacerbate matters, the baby boomer effect is a looming concern. Companies are already beginning to experience the forecasted demographic difficulties due to the aging of the baby boomer generation. For the 50 large multinational corporations in our global study, the percentage of executives aged 33 to 44 years was expected to decrease from the current 30% to just 18% over the next five years.

Poor Practices

Unfortunately, making people decisions is still one of the weakest of all key organizational practices. Consider the way companies make their financial decisions: with rigor, professionalism and the application of advanced knowledge. Contrast that with how people decisions are made. More often than not, the process is distinguished by a lack of rigor at every step, from figuring out when a change is needed all the way to the integration of the selected candidate.

Poor practices exist even at many blue-chip companies. In our recent panel with more than 100 top executives from the United States, Germany, the United Kingdom and France, only half believed that they are actually successful at identifying top performers and key potentials in their own organizations. In other words, half of all executives could very well be promoting the wrong individuals into important positions.

What to Do

At its root, the problem of how to make great people decisions is one of education. Specifically, companies need to ensure that their executives are aware of the value of people decisions, why those decisions are so difficult, how to determine when someone needs to be replaced, what to look for in a candidate, where to look for candidates, how to assess people, and how to attract, integrate and motivate the best of them. Moreover, the proper mix of training programs can enable managers to develop the right level of self-awareness in order to fight the subconscious biases that can easily sabotage their decision making. Beyond that, companies can best improve their ability to hire and retain top global talent by doing three fundamental things: adopt a new mind-set, cut the red tape and implement best practices.

Adopt a New Mind-set

Organizations need to be aware of the realities of the hottest emerging markets and the aggressive talent practices that are already taking place there. For example, Tata Consultancy Services Ltd., based in India, measures the costs of recruiting from different college campuses and other channels and then computes the return on that investment in terms of the yield of candidates that it can hire, the rate at which those individuals progress and their retention rate. From those calculations, TCS has placed the colleges into different categories, and at some schools it has begun to make blanket offers to every individual in the graduating class. TCS has also begun to work with some of those universities to help redesign certain courses in their curriculum to equip students better to launch a successful career at TCS or in the IT consulting industry in general.

Going one step further, Infosys Technologies Ltd. has created a campus in India, reportedly the largest corporate training center in the world, that is capable of handling 12,000 people per year — a greater number than many colleges can accommodate. Last year the facility hosted 100 Chinese undergraduates that Infosys trained to ramp up its operations in China. Other companies in India and China have been facing the dramatic challenges of hiring in one year the number of knowledge workers they used to hire in a decade. Some businesses have had to integrate a completely new work force into their organizations in just three years. Such demanding conditions require a new mind-set for making people decisions.

Cut the Red Tape

In the old world of low hiring needs and abundant candidates, companies used to focus almost exclusively on making sure that they would not hire the wrong person. Although that should always be a major concern, organizations must also realize that the situation is now nearly reversed: The best candidates are in very low supply, and the demand for them is extremely high. Thus, companies need to strengthen and expedite their hiring processes. The objective should be not only to avoid the wrong hire but also to make sure not to reject or lose the few candidates who are right for the position. One way to achieve both a reliable and fast hiring process is to involve just a few highly qualified assessors — individuals of extremely high caliber and competence for the task, properly empowered, with the right motivation and no conflicts of interest — rather than to follow the traditional practice of involving a large number of average participants.

On a related note, companies must also assign and properly empower some of their best leaders in emerging markets. (All too often, a manager is assigned to a business and geography according to the operation’s current size, rather than to its potential and strategic priority.) When a company has a competent executive heading a subsidiary — especially in a region where talent is scarce — that individual should have the authority to staff the operation without having to deal with reams of red tape from headquarters.

Implement Best Practices

The top multinational corporations are already applying a number of best practices, such as benchmarking their employees with international standards, developing an effective balance of local and expatriate talent, implementing systematic mentoring and coaching programs for local managers and defining appropriate succession programs for their central organizations. Moreover, they have begun to develop new approaches to overcome obstacles, such as “over-hiring” local talent — that is, purposely hiring a greater number of employees than needed to counter lower stick rates and other factors. The assumption is that, as the best of those individuals get promoted, the resulting improvement in the overall productivity of the organization will more than offset the extra cost of the additional new hires.

But recruitment remains a problem. When conducting a global study on senior talent, my colleagues and I found that, although CEOs were personally very involved in recruiting senior managers (as they should be), their approaches varied greatly. Specifically, they had striking differences in the number of candidates they would consider in a search, the assessment methods used, the number and types of participants in the assessment and decision processes, their biases for either external or internal candidates, the support for integration, the role of human resources and the use of outside professional help. We found that these individualistic approaches didn’t seem to be a function of company, sector, market or circumstantial needs but were rather the result of implicit personal preferences and organizational traditions that don’t seem to follow any model of best practices. This should not be surprising, given the widespread lack of formal education on the topic. Nevertheless, shouldn’t such a crucial practice as recruitment adhere to some basic set of empirically proven practices?

HISTORICALLY, THE PROCESS of making great people decisions achieved a major leap in progress around the time of World War I, when massive hiring led to the development of much better testing and interviewing techniques. Unfortunately, little has happened since then. Nevertheless, in the same way that Japan’s intense need to avoid waste and increase productivity turned that country into the source of numerous best practices in manufacturing and operations, the unprecedented challenges of hiring and retaining talent in emerging markets will eventually produce huge improvements in that area.

Already, a number of multinational corporations have begun to make the transition to competing for talent on a global basis. SAP Aktiengesellschaft, for example, had been struggling for years in the United States. Then the German software company changed its hiring practices, which had favored German expatriate executives, to attract the best local talent and has since become a major player not only in the United States but worldwide. Similarly, Nokia Corp. has made drastic changes to its compensation scheme, which used to follow traditional Finnish practices but is now more regionally based, in order to become a more powerful global competitor for talent.

Given the numerous challenges, the edge will go to those companies that are proactive in mastering their people decisions so they can hire, develop and deploy the best talent on a worldwide basis. In the future, such organizations will be able to adapt faster and not only survive but prosper in this new environment of increased globalization.