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An Ever-Changing Workforce Management Landscape

December 19, 2006
Related Topics: Change Management, Featured Article
Companies today are dealing with all sorts of challenges that are shaping how they do business—a tighter labor force, the start of baby boomer retirement, talent shortages in certain professions and escalating health care costs.

    These challenges will shape how employers tackle an array of workforce demands, from recruiting to relocating employees to designing health care benefits. Here is a review of the most influential workforce management trends that companies will need to address in the coming year:

Health care benefits
As companies slowly implement consumer-directed health plans as a way to alleviate rising medical costs, organizations are now focusing on teaching their employees how to be better consumers of health care.

    "It’s not enough for organizations to put in a plan design by itself," says Tom Billet, a senior consultant in Watson Wyatt’s Stamford, Connecticut, office. "Companies really need to invest in tools and education to help employees make better health care decisions."

    Consumer-directed health plans, which include a personal employee spending account and a high-deductible policy, are designed to persuade employees to become more prudent about their treatment decisions since they’re spending their own money.

    To help employees make smarter decisions, employers are offering online financial modeling tools. The programs, for example, might ask employees how many doctor visits, prescription drugs and other medical expenses they expect each year and then offer guidelines on which plan to choose and how much money to put in their spending accounts.

    The trend to better educate employees could help boost enrollment in consumer-directed health plans, which has proved to be a difficult task for employers. Nationally, just 1 percent of all covered employees were enrolled in consumer plans in 2005, according to Mercer Human Resource Consulting’s annual benefits survey of 3,000 employers. Just 14 percent of employees chose a consumer-driven plan when offered another option, down from 16 percent the previous year. Fear of the unknown likely contributes to those decisions.

    "A paragraph or two in the employee handbook is not enough," Billet says. "You need to take more of an aggressive approach to educating employees." Consumer-directed plans are expected to continue to increase among large employers, and small to medium-size employers should see some growth as well, Billet says.

    In 2005, 22 percent of companies with 20,000 or more employees offered a consumer-driven plan, up from 12 percent in 2004. Only 2 percent of all employers with 10 or more employees offered consumer plans in 2005, and only 5 percent of employers with at least 500 employees offered them.

Retirement benefits
   The retirement benefits landscape will likely see a resurgence of cash-balance pension plans in the next few years, now that any legal uncertainty has been put to rest with the recent passage of the Pension Protection Act. Over the past few years, many companies froze or terminated their cash-balance plans because of a 2003 U.S. District Court ruling that said IBM’s cash-balance plan violated age-discrimination laws.

    "The Pension Protection Act clearly defines cash-balance plans and lays down the rules," says Alan Glickstein, a senior consultant in Watson Wyatt’s Dallas office. "Employers now have a realistic path to go on." Cash-balance plans are a cross between defined-benefit and defined-contribution plans. The benefits are expressed in the form of an account that grows over time with interest and contributions from the employer.

    As employers continue to move away from traditional pension plans, they find that cash-balance plans are more cost-effective, Glickstein says. For the same level of employer benefit as a defined-contribution plan, cash-balance plans are significantly less expensive, in part because of professionally managed investment performance for the entire group of plan participants, which should outperform what each participant can do on his or her own in a 401(k) account.

    Thirty-three percent of the Fortune 100 companies offered a cash-balance plan in 2002, up from 1 percent in 1985, according to a Watson Wyatt study. In 2006, 27 percent of Fortune 100 companies offered a cash-balance plan. Many companies that were considering offering cash-balance plans were waiting for the legal ruling.

    The pension legislation has paved the way for another trend: Next year, more companies are expected to offer automatic enrollment in their 401(k) plans. The legislation "helps encourage a smarter version of automatic enrollment" because it allows the contribution rate to increase over time, Glickstein says. In the past, the same inertia that kept some employees from enrolling in plans without help also kept them at the default level for many years.

    "Using inertia to work for us rather than against us will help achieve a better outcome" in retirement savings, Glickstein says.

Legal issues
   In the wake of Enron and other ethics scandals, employers are getting hit heavily with retaliation charges.

    "It’s the largest protected class in the world because every single worker in every single workplace is a potential plaintiff," says Garry Mathiason, a San Francisco-based partner with Littler Mendelson, a national labor and employment law practice. "There were lots of retaliation charges before, but they didn’t get the attention and focus they get now. There’s been a sharp acceleration since Enron, and I don’t see this slowing down."

    The Equal Employment Opportunity Commission has seen a steady increase in retaliation charges in the past decade. In 2005, retaliation made up 29.5 percent of all charges, up from 15.3 percent in 1995.

    The numerous ethics scandals have shown workers that if they do experience retaliation and file a complaint, the law will be on their side more than ever before. Also, the courts and legislatures have increasingly given protections to people who file retaliation complaints. The Sarbanes-Oxley Act of 2002, for example, protects employees of a publicly traded company who report financial misconduct from adverse employment action related to their reporting activity.

    Also, a U.S. Supreme Court decision in June expanded the definition of what constitutes retaliation. In the past, the employee claiming retaliation had to prove economic harm. Now, the definition of retaliation is much broader and covers more subtle acts, such as giving an employee the silent treatment or not considering the employee for promotion.

    To deal with the upswing in retaliation claims and to protect against false claims, employers should write separate anti-retaliation policies that spell out zero tolerance of retaliation and provide for an independent investigation of any retaliation claim, Mathiason says.

    Employers also continue to have their hands full with class-action litigation, which has seen massive growth because of the willingness of state and federal courts to certify many employment law cases for class-action status and the fact that employers are increasingly settling these cases. Most cases are over wage and hourly issues, and there’s growth in claims over race and disparate treatment for age.

    "Plaintiffs’ lawyers have discovered class-action litigation as a road to wealth and now troll for people on the Internet for their cases," Mathiason says. "The financial rewards are so great that now it’s an epidemic."

Rewards & Recognition
   More and more, companies today are using rewards and recognition to tackle strategic business issues. In the past, recognition has lived in human resources, with the aim to decrease employee turnover.

    While that goal still exists, "we’re seeing recognition raised more to a business level," says Adrian Gostick, managing director of O.C. Tanner Co.’s Carrot Culture Group in Salt Lake City. Companies are tying recognition to their business goals, such as driving innovation and improving customer service, and these directives are coming from the top of organizations.

    "We’re talking much more to CEOs and COOs," Gostick says. "We never did that five years ago."

    Express carrier company DHL has a recognition program designed to reinforce customer service. The "Finding Their Heroes" program uses performance, service and on-the-spot awards to recognize extraordinary customer service. A trainer in one of DHL’s hubs was recognized after he sprinted to an ice cream store for ice when a package containing a blood sample was getting too warm as it was being delayed in customs.

    "They understand that you can’t just put a poster on the wall that says, ‘Customers Come First.’ The only way they’re going to develop that is by recognizing those behaviors," Gostick says.

   A hot growth area next year will be in recruitment process outsourcing, with more companies opting to farm out everything from searching for candidates to hiring new employees.

    "It’s as though [the vendors] were your own internal recruiting department," says Lisa Rowan, program manager of HR and talent management services at IDC, a global market intelligence and advisory firm based in Framingham, Massachusetts. "Most organizations have done some level of outsourcing by using search firms, but recruitment process outsourcing goes much deeper and broader than that."

    RPO refers to the entire process of identifying, screening, hiring, and applying and providing metrics so that clients can gauge the success of their recruitment strategies. In many cases companies are using these vendors to take over the hiring of lower-level workers, such as call center representatives, so their HR staff can focus on more strategic issues.

    The increasingly tight job market and looming talent shortage are driving the trend, as well as the fact that RPO can be more cost-efficient because it offers a fixed-price model, with employers paying on a per-hire basis, Rowan says. Forty-one percent of large companies with HRO contracts are outsourcing some of their recruiting, according to a study by Towers Perrin. This percentage is expected to rise dramatically as the costs associated with hiring increase, analysts say.

    HR business process outsourcing also is expected to continue to accelerate over the next few years. The U.S. HR BPO market is expected to grow 16 percent annually through 2010, to $19 billion, according to industry researcher IDC. Small and midsize companies with 10,000 or fewer employees are following the trend, Rowan says. Midmarket employers now have more options to choose from, with some vendors focusing specifically on midsize companies.

Training & Development
   Companies today are investing more in training and development, but at the same time corporate executives are demanding more proof that training dollars are tied to sound business results.

    "Companies are getting better at linking learning efforts to strategy and business," says Pat Galagan, executive editor at the American Society for Training & Development. "Before, training was done across the board, without thinking about how it supports a specific business goal." Now, it’s unlikely that a company will do training unless it relates to a goal it wants to achieve, Galagan says.

    And these are high-level goals, such as promoting the organization’s overall strategy, enhancing shareholder value or producing a better product. To show business results, employers are using more sophisticated metrics to assess learning programs. In the past, training was evaluated based on how many people attended a seminar, how many seminars were offered and the opinions of those who attended. Now employers want to know whether sales improved or if employees were up to speed more quickly on using a new product.

    While there’s added scrutiny on training programs, there’s been a consistent trend among employers the past five years to increase spending, according to ASTD’s most recent State of the Industry Report, released in December 2005. The average expenditure per worker on training and development was projected to reach $1,000 in 2005, up from $955 in 2004. In 2000, the total spend was $649.

HR software & technology
   The latest trend in human resource technology is a model known as "software as a service," in which companies access standard business applications over the Internet. It’s gaining speed in several workforce management areas, including core HRMS, recruitment and performance management. This "on-demand" software carries lower upfront costs than licensed software and allows for frequent and quicker upgrades. A major benefit is that organizations don’t need to make a large upfront capital expenditure, usually millions of dollars, to buy and install equipment, says Michael Cornetto, technology strategy consultant in Watson Wyatt’s New York office.

    While the cost per employee is higher, the lower fixed costs allow organizations to better plan for technology expenses, rather than dealing with the unknowns of maintenance and upgrades of licensed software. "All that pain and mess goes away," Cornetto says. "You know what it’s going to cost you from year to year."

    About one-third of the $3 billion annual market in human capital management software is currently delivered over the Web, and that proportion could rise to 50 percent by 2010, according to the research firm Forrester. But the model has raised concerns.

    Some complain of a lack of flexibility in the one-size-fits-all approach to software that is rented to many clients. Customer service is not always the best, and with the software being provided entirely over the Internet, the security of sensitive employee data is another concern. Nevertheless, this is a growth area for HR, Cornetto says.

    "Human resource departments have had a hard time getting organizations to invest in large capital expenditures," he says. With the software-as-a-service model, as technology or business needs change, "HR departments can swap out software-as-a-service solutions at the end of their useful life without the remorse of not being unable to recover" the high initial cost that comes with traditional implementation.

Recruitment & Staffing
   The talent shortage, together with a tightening labor market, is forcing organizations to be more accountable for their recruiting dollars and more aggressive about finding top people. As recruiters emphasize "active sourcing," tapping into as many avenues as possible to find strong candidates, corporate executives are demanding evidence that their work is paying off, says Mark Mehler, co-founder of CareerXroads, a recruiting technology consulting firm in Kendall Park, New Jersey.

    For HR departments, that means doing a better job of using applicant tracking systems to identify successful sources of hire.

    "Companies are spending hundreds of thousands of dollars on advertisements, career fairs and recruiters, and they want to know what they’re getting for it," Mehler says. "Recruiting continues to be more bottom-line-oriented. It’s a good trend."

    Employee referral programs are still the best source for hires and will continue to be so, accounting for almost one-third of hires, according to CareerXroads’ annual "Source of Hire" report. As employers feel the pinch for talent more in the coming year, organizations need to beef up their employee referral programs. They need to promote them better and follow through with a strong rewards program for employees who make successful referrals, Mehler says. Some companies are starting to hire call-center-type employees to handle the back-end administration of their referral reward programs.

    The Internet continues to be a hot source of hires, accounting for almost one-quarter of them in 2005. Temp-to-hire also is becoming increasingly attractive, Mehler says.

    "It’s huge, and will continue to be so," he says. "Employers like to try out people and see if they like them." Some employers will shift toward outsourcing recruiting functions in 2007, especially for high-volume recruiting and hiring.

   With baby boomers retiring, employers will need to adapt their relocation policies to reflect the changing demographics of the workforce. The typical transferee usually works in middle management, so as more midlevel managers leave the workforce, employers will need to "sweeten the pot" to encourage more employees to relocate, says Cris Collie, executive vice president of the Worldwide Employee Relocation Council.

    While the real estate market softens, one way organizations will offer more help is by beefing up their home sales assistance programs. In the past, a transferee might have been asked to sell his home on his own and be reimbursed for expenses.

    Now, more employers are offering to buy the employee’s home. In other cases, some employers are providing duplicate housing reimbursements when a transferee is paying mortgages on two homes.

    Global relocation policies will start to take a different shape too, Collie says. More companies will continue to use short-term assignments of a year or less.

    That’s not only because of the escalating costs of long-term assignments, but because members of a younger workforce are more reluctant to move their families for the traditional three-year stint. Their children’s educational needs are often the controlling factor. Collie has heard anecdotally from some of his organization’s members that some companies have started turning to their older workers, who are in the later stages of their career and more free to move, to fill global assignments.

    "The dynamics of the workforce today are so complex, you have to view relocation differently," Collie says. "You have to think outside the box."

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