Game-changing: Financial Analysts Begin Assessing Talent Management Effectiveness

With access to and leverage of talent playing a more critical role in an organization’s ability to succeed than ever before, it should come as no surprise that the financial analyst community would start evaluating talent management capability when rating organizations. The fact that analysts historically haven’t paid much attention to factors like an organization’s ability to recruit, develop, or retain top talent has allowed HR to operate pretty much “under the radar,” without standardized analytics.

The OMG moment for talent management leaders is coming.

Financial analysts and executives have finally begun to make the connection between excellent talent management practices and profitability. More and more of the financial powers that be are considering making talent-management-effectiveness assessments mandatory. When the interest rate your organization gets on a major line of credit is influenced by your talent management effectiveness, you can bet the degree of scrutiny from both internal and external leaders will change the game.

The Power of Financial Analysts

Ratings by key financial analysts can make or break a company. If an influential stock or bond analyst gives your firm a positive or negative rating, your stock price can change by double-digit percentages almost instantaneously. Moreover, because evaluations by financial analysts can come without warning, you can make a strong argument that the CEOs of large public corporations fear the wrath of external financial analysts even more than they fear irate stockholders and auditors. It should be clear to the leader of any business function or unit that if their unit is negatively cited in an external financial analyst’s report, that the leader and the function are both guaranteed to bear the wrath of the entire executive team.

Moody’s Begins the Change

Moody’s is an internationally known corporate bond rating service. Its bond rating can dramatically impact the cost of corporate credit. In a recent report on the outlook for the healthcare industry and the primary factors that contributed to profitability, Moody’s made a direct connection between financial performance and success in the talent management areas of recruiting and retention. Lisa Goldstein of Moody’s wrote that an effective strategy focusing on quality could:

“result in improved market share, better ability to recruit and retain physicians, lower nursing vacancy/turnover rates, improved financial performance…”

This statement clearly connects recruiting and retention with organizational performance in both market share and financial performance. In this report, Moody’s also cites the importance of additional talent management functions, including leadership development, training, and benchmarking best practices. Moody’s has made it clear that these types of factors will now influence its bond ratings. Given the widespread exposure that this report generated (it was highlighted in a Forbes article) talent management leaders in other industries can now expect their executives and an increasing number of financial analysts to increase their scrutiny and raise their expectations for the talent management function.

Google Also Connects Talent Management and Business Success

In addition to financial analysts, Google has taken the lead in making shareholders aware of the importance of talent management. For example, as early as 2004 and continuing up until the present day, Google has in its SEC legal filings been clearly stating the direct connection between talent management and company success. For example, in its June 2007 filing, it stated that “We believe that our approach to hiring has significantly contributed to our success to date.” It also included this important statement under the “risks” section: “If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively.”

Additional Connections Between Talent Management and Business Success

Although no individual firm has yet to make the direct connection between its talent management success and improvements in its stock price, analysts have shown that there is a connection. For example, researchers at the consulting firm Watson Wyatt using its human capital index found that good people practices can increase a company’s value by as much as 30%. Russell Investments reports that firms on the Fortune “100 Best Companies to Work for” list outperform the S&P 500 and the Russell 3000 by as much as 10%.

Risk Management and Workforce Planning Collide

Workforce planning has been a key practice in best-practice organizations for some time, but despite years of continuous improvement, most organizations have had less than stellar success linking such efforts to the business. Outside the HR function, more and more organizations are realizing that lack of capability or lack of effectiveness in talent management produces risk to the organization. Furthermore, actuaries in risk management know how to model such risk and peg potential dollar-impact assessments to each. ERE Excellence Award winner Dan Hilbert has been working on tools that help organizations better merge workforce planning, financially focused headcount planning, and workforce risk management for several years. The response to the tools he has architected as CEO and Founder of OrcaEyes is stellar when the audience is made up of finance, operations, and risk professionals, but not so much with traditional HR professionals who struggle to comprehend the depth of analysis. What is easy to predict is that risk modeling will become a standard practice, but that HR may not be the driver!

Action Steps

If you are a talent management leader who wants to be proactive, strategic, and demonstrate a commitment to enabling/driving the business, don’t delay action until this external assessment trend hits you in the face. Instead, consider it as an opportunity to show off the results that you have worked so hard to produce. Some action steps that I would recommend include:

  • Start by putting together a team of financial and metrics experts in order to prepare for this added visibility and scrutiny.
  • Develop a set of workforce productivity metrics, starting with revenue per employee but escalating to the ratio of the dollars of labor costs to dollars of corporate profit.
  • Develop a set of correlations between improved results in recruiting,retention, development, etc. and increases in business results, including sales, customer satisfaction, and product quality.
  • Learn how to convert your talent management results into their impact on corporate revenues. For example, reporting a 5% decrease in turnover just does not have the same impact as reporting the fact that the 5% decrease resulted in a $3.2 million increase in revenues.
  • Develop a methodology and approach that allows you to prepare for and to successfully respond to analysts questions and inquiries.

Final Thoughts

At many firms, the largest single variable expense is employee cost. Because it is such a large expense item, it must provide a positive return on investment. Unfortunately, many HR leaders have been reluctant to even calculate their return on employee costs. If what many predict will happen does happen, very soon you will have no choice but to calculate such metrics and suffer public scrutiny. Depending on how your results rank, that could be a great day, or alternatively, it may be your last day.

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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