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Archive for April, 2015

Getting beyond bureaucracy in human resources

By becoming more strategic and operating with an edge, corporate HR departments can boost their effectiveness and shed their bureaucratic reputation.

At big corporations, human-resource organizations frequently conjure up images of bureaucratic weight and paper pushing. Need that be true? This question comes into sharp relief in McKinsey alumnus Peter L. Allen’s description of HR approaches at his company, Agoda, which has been trying, with some success, to minimize the need for many traditional HR processes while transferring others to business leaders. (See “Toward a new HR philosophy.”) Although it’s easiest to see how some of Agoda’s human-resource initiatives apply to start-ups, our experience shows that it’s also possible to right the balance in large organizations without going too far. Getting more strategic and operating with an edge often are two keys to success.

Getting more strategic

One reason large organizations end up with a supersized human-resource infrastructure is that the business rationale for HR processes has been lost. But there’s an antidote to massive HR systems, questionnaire overload, and multipage templates: stimulating a dialogue about the underlying strategic purpose of those tools—a dialogue that often helps management realize that they can be controlled and applied more effectively. A global healthcare company, for example, realized that its performance-review process gave it only a superficial understanding of who its high performers were and what feedback helped them to develop. It decided to deemphasize a time-honored nine-box calibration grid in its evaluation procedures and radically simplified employee reviews. We also know a senior leader who reduced his company’s performance-review form from four pages to four questions—but who rightly insisted that those four questions had to be answered and tracked more rigorously.

In the latter case, the leader was a chief human resources officer (CHRO) with the insight to identify core business issues and the discipline to eliminate redundancies. Strategic leadership can come from outside HR, too. A financial-services company recently charged its second-highest-ranking executive with personally directing talent-review procedures for top professionals across the firm. That required him to take a step back and assess the business’s most significant talent indicators, which turned out to be poorly reflected in its HR systems. The company’s leaders, previously stuck in a process-oriented rut, have now articulated the strategic rationale for what they are doing and why it’s important—in this case, to understand the company’s people, help fill talent gaps, and thereby improve returns. It is now building a database and infrastructure to capture those results and make the highest performers more visible. HR might have had a difficult time, on its own, committing the company to new performance criteria and gaining the resources to update its systems, but collaboration with a major leader gave the effort teeth.

Operating with an edge

It’s easy to say, “HR needs to let go and get out of the way,” but the pendulum can easily swing too far in the other direction: granting managers unlimited freedom in making HR decisions can generate too much variability, potential liability exposure, and cost creep. Moreover, when HR pulls back too far, it misses opportunities for using rigor and facts to gain predictive insights, whose potential is growing with big data and advanced analytics.1

Talent pools and gaps

High-quality, timely information about talent pools and gaps represents a competitive advantage that HR is uniquely positioned to provide. For example, a grocery line manager in a global retail organization may have proved herself in Argentina just as a gap opened up in Mexico. An oil and gas organization may have a budding leader who is running out of growth headroom in the Middle East and a need for similar expertise in a bigger role in Houston. HR should ensure that these critical connections get made and then help line managers seize opportunities. The best HR organizations also offer a perspective on emerging gaps. For example, as digitization becomes more critical to cars,2 leading automakers need to put more emphasis on recruiting computer engineers—a challenge for organizations accustomed to recruiting mechanical engineers.

Compliance

Compliance efforts in areas such as labor and antidiscrimination obligations can easily make forms and layers of bureaucracy proliferate. But while an overly assertive HR department can constrain the smooth functioning of a business, companies are no better served by a “wallflower” department that misses red flags or neglects to enforce discipline. A rigorous HR function—an “adviser with an edge”—should track and interpret data and assert a point of view: “yes, we are doing well realizing internal goals or meeting industry benchmarks” or “no, we may be beginning to run off the rails.”

One leading consumer-packaged-goods manufacturer and distributor, where onsite generalists had previously taken the lead, recently created a “SWAT team” for labor relations and compliance. The team discreetly monitors metrics for proven warning signs and moves in when the company needs subject-matter expertise. Oversight has improved and line managers have clear incentives to get compliance right—without forcing HR professionals to become omnipresent process police. Rather, their mission is to interpret events and respond rapidly to potentially significant breakdowns.

Leadership development

Many leadership-development efforts don’t achieve their goals, because they ignore the business context and offer insufficient opportunities for personal reflection and individualization.3 While it would be easy to conclude that corporate HR can add little value to leadership development, the reality is more complicated. Letting “a thousand flowers bloom” often means that leadership gets ignored in some corners of a company and that others reinvent the wheel too often. An assertive HR department clarifies expectations for leadership development across the company, provides a baseline backbone of proven tools and methodologies, and flags priorities to adapt them to the needs of businesses and individuals. HR and business-unit leaders then collaborate to fine-tune programs.

Managers must lead, and HR must help them to do so. But the well-founded inclination to swing the HR-process pendulum away from bureaucracy and toward a freer hand for management should not lead organizations to veer from “ditch to ditch.” Shifting too drastically is plainly a bad idea; in many cases, a complete HR overhaul is unnecessary. At all events, HR has opportunities to assert its expertise and strategic thinking in a low-profile, nonintrusive way. That requires both rigor and restraint—but, we’ve found, provides the sort of insights about talent, leadership, and performance management that all companies need, regardless of their size.

April 2015 | by Neel Gandhi and Bryan Hancock, McKinsey Quarterly

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Toward a new HR philosophy

HR should empower managers to decide on standards, hire how they choose, and develop company-wide leaders.

What is the appropriate role for the human-resources function? Many companies view it as merely administrative, with little or no strategic impact. Of course, HR leaders bridle at this perception and regularly seek ways to have a seat at the table. In the quest to be viewed as more strategic and more important, HR often tries to take on greater responsibility.  Yet the gap between HR’s aspirations and actual role persists.

I’ve observed this gap in a variety of organizations, both as a consultant and as an in-house manager at several multinationals. Fundamentally, I believe, the gap arises from two complementary causes. First, executives and managers often think their job is to get financial results rather than to manage people. Second, when executives and managers neglect people management, the HR function worries about lapses and tends to “lean in” to right them itself. On the surface, this approach seems to meet an organization’s needs: management moves away from areas it views as unrewarding (and perhaps uncomfortable), while HR moves in, takes on responsibilities, solves problems, and gains some glory in the process.

But this approach is based on erroneous thinking. It is bad for management and bad for the company as a whole. When HR sees itself as manager, mediator, and nurturer, it further separates managers from their employees and reinforces a results-versus-people dichotomy.1 That’s why many HR teams refer to the rest of the company as “the business”; too often, they don’t really perceive themselves as a core part of that business.

Helping managers manage

I joined the online travel agency Agoda.com three years ago to lead the HR function. Mindful both of problematic patterns in other organizations and of a CEO deeply averse to traditional HR, I have tried to build a different model. My department’s fundamental goal is to help managers manage better, not to manage on their behalf. While we have a long way to go—Agoda is still in many ways in start-up mode, despite having over 2,000 employees in 28 countries—we’ve made significant progress.

I believe that sharing our experience may prove useful for other organizations as well. Our approach is based on a few core principles:

  • Managers, not HR, should define, live, and develop the company’s leadership.
  • Managers, not HR, should do the hard work of managing people—hiring, evaluating, rewarding, and disciplining employees—and managers should be evaluated on their results.
  • Employees, not HR, should “manage up” and take responsibility for solving problems directly with their managers.

In addition, we’ve taken the symbolic but important step of renaming our department People and Organization Development rather than Human Resources. We’ve also tried to hire the smartest and most talented people we can find, regardless of whether they have traditional HR backgrounds. Results so far have been promising.

Developing leaders

While leadership development should always be a top priority for HR, many companies approach it in counterproductive ways. One major division of a Nasdaq 100 company, for example, outsourced leadership development to an external provider—not uncommon given the proliferation of specialist consultancies offering this sort of service.

Outsourcing leadership development, though, is risky. Perhaps not surprisingly, the management of this division was ultimately taken over by a different part of the organization. In another multinational I worked with, every level of employee development (from job candidates to executives) was evaluated on a different set of leadership criteria, creating confusion about what mattered for success. In addition, this company’s high-potential pool varied by as much as 40 percent from year to year because the assessment was so subjective. Although HR tried to treat these employees as privileged and told them they were destined for great things, senior management continued to fill open senior roles from the outside because it did not value the “high-pos.” Predictably, many of them left the organization.

Rather than hand leadership development in its entirety over to external experts, we’ve tried to build it from the inside. Our CEO and senior leaders worked to clarify our own leadership characteristics, the qualities that make people successful at Agoda, and the behavior and principles that make it grow. We’ve shied away from evaluations based on leadership potential because we are skeptical of our own ability to predict future performance. Instead, we focus on behavior that we can observe now.

Individually, the leadership characteristics we esteem are not unusual: most organizations, after all, value qualities such as integrity and intelligence. But when we combine these with “thinking like an owner,” innovation, and the ability to inspire others, we begin to define leadership in ways that really matter in the Agoda context. We apply the same leadership principles to every stage of the employee life cycle. We use them to guide hiring decisions; we teach them in new-hire orientation sessions; we rate them in semiannual performance evaluations; and we use them to assess an employee’s readiness for promotion. This approach means that we have a set of criteria for the skills and behavior managers should live by and employees should believe in. It helps us to select and reward employees who contribute the most to the organization, both in the short and the long run. Leadership at Agoda is truly suited to the company.

Leadership is also something we expect of all our employees, whether or not they have people-management responsibilities or direct reports. We start teaching this principle and the relevant leadership skills during the orientation of new hires, so that our values are clear from the beginning. To make sure that the leadership style we teach is really our own, we involve managers heavily in assessing the needs of the company, designing and building curricula, and teaching. Not all managers are born to play that role, of course, but we teach them teaching skills and cofacilitate where appropriate. We strive to make it clear to everybody that our leadership values are specific to our company. They are the rules we live by.

Letting management manage

As often as possible, we strive to ensure that managers make the critical HR decisions. Managers have to live with the results the people on their teams produce, so managers should be empowered to make relevant decisions and held responsible for outcomes. If HR constrains decisions too closely—by determining who should be hired, how much they get paid, or their performance ratings—managers no longer have the freedom to obtain the results they desire. In that case, it is neither logical nor productive to hold those managers accountable.

With freedom, of course, comes responsibility, especially the responsibility to make good decisions. One example is recruitment. Our People and Organization Development team provides a flow of qualified candidates, but it is the managers who conduct the interviews and choose whom to hire. Our role is to provide managers with actionable data and useful tools, such as an in-house recruitment certification program we are building to develop hiring skills.

We also evaluate our candidates using an array of standardized tests—an important approach for our global company, which, at last count, employed people of 65 nationalities. Test scores help us compare different candidates in a group with each other and with our current employees. While we don’t have strict cutoffs, we are building guidelines that correlate with performance. The goal is to enable managers to make better hiring decisions through objective data.

Agoda applies the same philosophy to other people processes, including performance assessment; our goal is to help shape management decisions rather than make them. We’ve adopted an employee-scoring system and work hard to communicate what the five-point scoring range means for managers and employees (exhibit). We do not try to fit every department’s scores to a predetermined ratio. Instead, we take the data from each review cycle back to department heads and ask them whether their evaluations really reflect their departments’ performance—and what their underlying development needs really are. We ask a lot of questions and share lots of data, but we don’t come up with the answers. This approach, we believe, builds responsibility and makes for better management over time.

Compensation

As with performance, so with compensation: the People and Organization Development team consults rather than controls. We do not set strict minimum and maximum pay numbers. Instead, we research market salaries and provide guidelines (but not limits) to managers. Departments make compensation decisions because they are responsible for hiring the right people and managing how those people perform. We make a particular point of not setting predetermined caps for jobs (in technology, for example) that provide a significant competitive advantage for the company.

Perhaps surprisingly, this approach does not fuel extravagant pay. Department heads have an incentive to be conservative with pay packages because senior management’s compensation depends on the company’s profitability. At times, indeed, we encourage departments to pay more than they first proposed to do. In addition, our CEO reviews all annual compensation, providing a company-wide check and balance. If we conclude that an employee’s contribution will justify his or her cost, we can compensate at levels higher than industry norms. While this approach may lead to inconsistencies in the pay of employees who are nominally at the same level, we’re willing to accept this outcome. We believe that the resulting improvement in company performance benefits all of our employees.

Dealing with conflict

Our philosophy of helping managers to manage plays an important role when people problems arise. Traditional HR departments often find themselves—or put themselves—in the position of mediator between managers and employees. We try to avoid this role. Instead, our goal is to empower both managers and employees with the skills, information, and best practices to resolve problems together. We teach people-management skills not only to managers but also to employees, who need to know that they are responsible for helping to resolve problems by having difficult conversations and “managing up.” This belief reflects our philosophy that leadership skills are critical for everyone in the company.

Obviously, problems do arise, but we teach employees that when they do, their next port of call is not HR but the manager’s manager—or even managers further up the chain, up to and including the department heads who report directly to the CEO. This approach is a challenge, but it works when management is prepared to take on greater management responsibility rather than say, “HR can handle it.”

People people

Last, we take a somewhat unconventional approach to hiring into People and Organization Development itself. Our function is quite lean, and we are rigorous about whom we hire. We test candidates and make sure they are interviewed extensively, both by senior members of the department and by our internal clients. And while some department members do have direct experience in HR fields, a number—even some in senior roles—do not. In fact, we usually rule out candidates with too much big-company HR experience; we find them excessively bound to an HR-knows-best philosophy. Instead, we look for very smart people with an interest in the field and a desire to enhance the company’s performance from a people perspective. International education, high test scores, emotional intelligence, and commitment matter more to us than résumés that check the HR boxes.

Creating a different kind of people function requires a shift in perspective from the department and company management alike. We believe that HR best serves the company’s interest by analyzing and sharing data, building skills, and developing leaders. The company’s management, for its part, must take real responsibility for hiring, evaluating performance, determining compensation, and releasing underperformers. This shift is still a work in progress.

But as both sides let go of old attitudes, the false dichotomy between employees and managers is beginning to fade. Our people are working together, and our company is becoming more productive. By taking what appears to be a less active role than other HR departments do, we are actually gradually achieving greater influence and greater success—both for the company and for ourselves.

April 2015 | by Peter L. Allen, McKinsey Quarterly

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Today’s Personality Tests Raise the Bar for Job Seekers

More companies use assessments to hire, with fewer willing to take a chance on anyone who doesn’t measure up

The Delaware North Cos., a hospitality company whose customer-service representatives help people plan vacations at national parks, sometimes struggles these days to keep 80 or so seats filled at its call center in Fresno, Calif.—a city tied for the 9th-highest unemployment rate in the U.S.

The company has no shortage of job applicants. But finding the right candidates has gotten tougher since the company started using a customized assessment last year to see how applicants stack up against top call-center workers in such traits as friendliness, curiosity and the ability to multitask.

Managers said the new test, administered online, has reduced turnover and allowed Delaware North to more accurately select applicants who best fit the job. “Now we understand better what makes a great reservation sales applicant,” said Andy Grinsfelder, vice president of sales and marketing for the Buffalo, N.Y.-based company’s parks and resorts division.

Pre-hire assessments have been used for years, but never have such tests been deployed so widely at companies across the U.S. The automation of the job application process, combined with powerful data tools and inexpensive online software, have led to falling costs, more accurate results and a surge in use.

Eight of the top 10 U.S. private employers now administer pre-hire tests in their job applications for some positions.

These tests have, in effect, raised the bar for U.S. job seekers: With more companies holding an alleged formula for workplace success, fewer are willing to take a chance on anyone who doesn’t measure up.

In 2001, 26% of large U.S. employers used pre-hire assessments. By 2013, the number had climbed to 57%, reflecting a sea change in hiring practices that some economists suspect is making it tougher for people, especially young adults and the long-term unemployed, to get on the payroll.

Employers are taking longer than ever to fill jobs, with the stepped-up search for excellence joining other factors that slow hiring, such as the reluctance to raise wages, and mismatches in skill or education between applicants and jobs.

Companies aren’t settling for people with minimum skills; they want applicants who stand out in ability and workplace temperament, a new recruiting standard they say yields longer tenure and higher productivity.

Steven Davis, a University of Chicago economist who has studied the gap between job openings and hires, found the annual sum of hires and separations—called labor-market churn—has declined by more than 25% since 2000, suggesting, he said, that as employers intensify their front-end screening, among other factors, “a larger fraction of the people they hire are working out.”

The latest generation of pre-hire assessments augments other hiring hurdles whose use has also grown over the past decade, including criminal-record and credit checks. “The incentives to screen before hiring have increased over time, while the costs have declined,” Mr. Davis said. “Both those things are encouraging employers to move away from what was essentially a trial employment situation to just screening people out in advance.”

One result, he said, is that fewer applicants clear the bar set by employers.

Companies want to pluck only pearls from an ocean of applicants, even if it takes a bit longer. Employers in February took 26.8 days, on average, to hire for open jobs, an all-time high, Mr. Davis’s research found. Even during the peak of the prior expansion, jobs were vacant 23 days at most, on average.

Employers are figuring out how their top employees do their jobs and are using that information to screen new hires, said Jay Dorio, who develops assessment tools for the Smarter Workforce initiative at International Business Machines Corp. “That’s where the future is,” he said, “and we’re doing it today.”

Personality tests were developed for the workplace in the 1940s and 1950s by research teams at industrial companies like AT&T Inc. They were first used largely to screen candidates for management jobs. Employers wanted to know, for instance, if a potential executive was an extrovert, prone to anxiety or an office backstabber. They fell out of favor in the 1960s, after researchers questioned their reliability, only to resurface in the 1990s, when industrial psychologists determined they had value as a hiring tool.

This was followed by a shift to online job applications in the early 2000s that allowed employers to streamline the recruiting process—historically labor-intensive. Taking stock of “candidates’ data now takes minutes or seconds instead of months,” said Brian Stern, president of Shaker Consulting Group, an assessment vendor.

Falling costs

Cheap, effective software-based assessments have allowed even small companies to analyze their workforces to pinpoint the kind of employees who perform well and stick around. “The notion of using data in hiring,” Mr. Stern said, “that’s moving to all size businesses.”

Tests in the past gauged only a few broad personality traits. But statistical modeling and better computing power now give employers a choice of customized assessments that, in a single test, can appraise everything from technical and communication skills to personality and whether a candidate is a good match with a workplace’s culture—even compatibility with a particular work team.

Furstperson, the company that developed Delaware North’s test, can score personality and work styles by asking applicants if they agree or disagree with a long list of such statements as “I dislike yelling, but sometimes a little yelling is necessary,” and “I have never understood why some people find abstract art appealing.” They are designed so applicants can’t figure out the best answers to get hired.

Companies in the billion-dollar pre-hire testing industry say more precisely matching applicants with jobs leads to longer, happier careers because employees are less likely to quit or be fired.

The assessment algorithms also can be easily refined and updated. Furstperson recently analyzed 20 companies—a call center and 19 of its subcontractors—that use its test. In 2012, before the assessment test was adopted, 90-day attrition—the proportion of employees who quit or were fired after three months—was 41%. After the tests and subsequent revisions, 90-day attrition fell to 34% in 2013; 28% in early 2014; and 12% late last year, said Jeff Furst, founder of Furstperson.

The tests, of course, are fallible. “Predicting what humans will do is really frigging hard,” said Charles Handler, the president of Rocket-Hire, a consulting firm that advises companies on using the assessments. “Tests are a predictor and better than a coin toss, but you have to be realistic about them. There will be false positives, people who get through that shouldn’t, and false negatives, someone who should’ve gotten through that didn’t.”

U.S. workers looking for jobs say they aren’t happy about the new hurdles.

Chuck McCrory, a former academic adviser at the Art Institute of Philadelphia who was laid off in 2012 after 11 years, said he felt like he was up against “an invisible wall” during his lengthy job search.

“Most of the tests are what I believe to be common-sense tests,” Mr. McCrory said, questions asking, for instance, what to do when a customer calls with a complicated request for help five minutes before the end of a shift. The problem with the assessments, he said, is “you don’t get results back, so you have no idea what you did wrong or how to improve.”

In February, Mr. McCrory, age 51, started a job at Drexel University helping students navigate through registration, financial aid and other college paperwork. The school ran a background check and called his references, but it didn’t require a pre-hire assessment.

Mr. McCrory said he wished he could have spoken directly to other prospective employers during his job search. But he could never get past their tests.

“Why don’t you bring me in and see the passion for what I do, see that I’m a really kind individual that will bend over backward for your company?” he said.

Employers’ selectivity grew in the recession and has largely continued. Companies with a glut of applicants have their choice of the best talent at the right price. College degrees, for example, are asked for jobs that never before required one—so-called credential creep. Labor-market analysis firm Burning Glass Technologies found that 60% of ads for computer help-desk jobs in 2013 required a bachelor’s degree, even though only 39% of the workers in similar jobs had the credential, according to census surveys around that time.

“We look at the way applicants answer questions to see who would thrive in our environment, not just survive,” said Charlotte Harris, global HR director at Regus PLC, which rents out temporary office space around the world.

In 2013, the company started giving applicants for customer-service jobs a 15-question test designed by IBM. Ms. Harris said Regus, which employs more than 11,000 people, wants new hires with “the right DNA and mind-set to be successful here.” The IBM test screens out half of applicants.

“We’re looking at the top 50th percentile of people applying to us,” Ms. Harris said, “and we’re constantly raising that bar.”

Employers can measure and analyze what differentiates their best performers in a variety of occupations—from fast-food workers and retail store managers to insurance agents and nurses—and use the data to create a profile of ideal workers. The tests show how applicants compare.

“We use our existing employees that we know are really good at the job and then try to find people who [test] just like them,” said John Marick, co-founder of Consumer Cellular, a cellphone-service company with call centers in Oregon and Arizona.

Some tests capture not just answers, but the amount of time applicants spend on questions, or whether they scroll back to reread test instructions.

Results fed to hiring managers can be as simple as a green, yellow or red light indicating the scoring algorithm’s recommendations—or run into pages of detail about a candidate’s performance.

Researchers at the University of Toronto, Yale University and Harvard University in one of the first academic studies of pre-hire testing found, in unpublished research, that managers who ignored test results picked workers who were more likely to quit or be fired. In other words, the algorithm was better at hiring.

Employment data charts

Willing to wait

Even with the tightening job market, employers haven’t shown any inclination to lower standards. If Delaware North can’t find enough top candidates, Mr. Grinsfelder said, it will broaden the pool by posting on more job boards or allow some new hires to work from home.

Likewise, at Consumer Cellular, “If we’re struggling to fill the seats,” Mr. Marick said, “we double down on efforts to get people through the door rather than lower our standards.”

Mr. Marick said his turnover rate has fallen to 8%, about half the industry average. Fewer people, he said, now come in with the attitude of, “‘I really need a job but I don’t like people.’ If we took that person on, they’d probably decide in a few months, ‘I don’t like it here,’ and move on.”

Tougher screening has also improved retention at Delaware North’s Fresno office. The company used to hire 15 people for every 12 jobs, knowing about three workers would drop out during training. Now it hires 14.

Patrick Corbett, 46 years old, discovered the tests after he was laid off a few years ago from his job as a mortgage processor for Citibank. Though he now works in technical support for a large company, Mr. Corbett sometimes applies for jobs, he said, and assessment tests are required for nearly every one.

“Companies just keep adding more and more of these hoops,” he said.

Last fall, Mr. Corbett spent about an hour filling out the multi-page test for a mortgage processing job on the website of ClearFit, a job-matching service. Soon after, ClearFit emailed Mr. Corbett to ask that he retake the test.

“Our system can detect when people are overthinking, or rushing their responses: this may have happened to you,” the email said. “This can skew your results.”

Mr. Corbett said he didn’t bother. “When I go to apply for a job and they state ‘You must take the personality test,’ I just don’t apply,” he said. “I don’t feel like wasting another hour of my life for a job I won’t get.”

Written by Lauren Weber at Wall Street Journal

 

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On-Demand in High Demand

Why are high cost professional service providers such as lawyers, accountants and management consultants logical targets for disruptive business models?

The ranks of the large law, accountancy and consultancy firms are ripe for thinning.

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Posted on the Australian Financial Review

 

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