While 2004 offers hope for an economic recovery, the confusion caused by this newfound reality isn’t likely to disappear. Today, organizations face far greater challenges than ever before: a tough, rapidly changing labor market; a dearth of talent as well as obstacles to keeping existing employees productive; challenges in adequately training and developing workers; soaring health-care costs and the ongoing task of making human resources smarter, more relevant and more meaningful.

    "Any organization that isn’t worried about the state of the workplace should be," says Scott Cohen, national practice leader for talent management at Watson Wyatt Worldwide. Edward Lawler, a professor at the University of Southern California’s Marshall School of Business, adds, "A rapidly changing world requires more active and proactive management skills. Many companies simply aren’t prepared."

    Success increasingly requires a focus. Some organizations, like the state of Minnesota, are turning to analytics tools that once orbited outside the universe of human resources. Others, such as professional services firm Inquisite in Austin, Texas, are building powerful performance-management systems that identify organizational and individual strengths, weaknesses and needs. Still others are turning to creative and innovative ways to reward employees and retain elite talent.

    If there is a common theme, it’s this: Despite disruption and pain, there are opportunities in workforce management.

Labor pains won't go away
    It certainly isn’t grandpa’s workforce. The growing use of temps, independent contractors, consultants, part-time employees and outsourced labor is changing the way both employers and employees think about jobs, loyalty and the pursuit of goals. It’s putting greater pressure on human resources to manage diverse groups of workers--often with wildly divergent values and attitudes. Factor in a sluggish economy, ongoing layoffs, a skilled-labor shortage and clampdowns on H-1B visas, and many companies are reeling. "It’s a very different environment than it was only a few years ago," says John A. Challenger, executive vice president of Challenger, Gray & Christmas, Inc., a Chicago outplacement firm. "The challenge is to build synergy, teamwork and a cohesive culture from all the fragments."

    The situation isn’t likely to change anytime soon. Although the economy is expected to display a pulse in 2004, underlying fiscal trends remain painfully intact. First, baby boomers are aging, and there aren’t enough young workers to plug into the labor force. Second, a shortage of engineers, computer programmers and technical specialists has left many U.S. companies feeling like a sports car that can’t get the high-octane fuel it needs. Finally, a recent study conducted by Teradata Corp., a division of NCR, shows that average employee tenure is now at an all-time low of 3.6 years.

    Those in the trenches are well aware of these problems. John Malenic, director of human resources at NVIDIA, a Santa Clara, California, firm that manufactures high-end graphics chips and boards for the computer industry, is among those struggling to keep performance revved up. In fiscal 2003, the 1,500-employee company bucked a general downturn in the technology sector and racked up a sales growth of nearly 40 percent, approaching $2 billion in sales. It is adding employees at an annual clip of more than 30 percent. "Because of the downturn in the economy, it has been possible to find talent, but when things pick up, all bets are off," he says.

    Like many other tech executives, Malenic is irked at the federal government’s move to slash the number of H-1B visas to levels of the pre-dot-com era--approximately half of peak levels. He says that it is increasingly difficult to find the engineers and technical experts needed to build sophisticated semiconductors. What’s more, companies face limits on the number of visas for workers from particular countries, further reducing flexibility. Although such cutbacks fall under the guise of homeland security, he and others believe that old-fashioned protectionism is also a key factor. "There’s still a fear that we’re hurting American interests by giving high-end jobs to foreigners rather than U.S. citizens," he says.

    Ironically, the employment crunch is prompting some companies to outsource IT, computer programming and entire design functions to India, China and other countries. Nearly 5 percent of human resources jobs have moved offshore in the past year, and the figure is expected to climb to 15 percent by 2007. By 2015, 3.3 million U.S. high-tech and service-industry jobs will be overseas, according to Forrester Research. That’s 2 percent of the entire workforce, and $136 billion in U.S. wages. So far, the Bush administration has adopted a hands-off approach--though it’s anyone’s guess how things will play out in the months ahead.

    Even for firms that aren’t dealing with an acute shortage of knowledge workers, the challenges are daunting. Jonathan Fayman, CFO at WR Hambrecht + Co., San Francisco financial services firm with about 120 employees throughout the United States, has found that it is difficult to manage a demographically and geographically diverse group of workers and provide a high level of employee services and support. That has prompted him to outsource the entire human resources department to TriNet, a leading provider of workforce-management services based in San Leandro, California. "It simply doesn’t make sense, from a cost perspective or a strategic perspective, to handle these functions internally," he says.

    Ultimately, Challenger sees older workers staying in the workforce longer to fill labor shortages, a greater reliance on temps and independent contractors to plug knowledge gaps and reduce the cost of benefits, and a growing acceptance that a global economy has taken root. Oracle Corp., for instance, already has 2,000 employees in India and expects to move 2,000 jobs in software development, plus accounting, payroll and customer-service positions, offshore in the coming months. "The most successful companies will find ways to overcome the challenges," he notes. "Strong, creative management is absolutely essential."

Scouting for talent
    Revising an effective hiring and retention strategy has never been easy. But the last few years have generated enough anxiety and anguish to cause ulcers for the Dalai Lama. While many companies find themselves laying off employees to meet budget expectations and shareholder demands for profitability, executives are also aware that a looming shortage of technically trained workers could cripple an organization in the future. "The writing is on the wall," Cohen says. "Organizations will increasingly compete for the smartest and the best individuals."

    At the same time, many are struggling to develop strong and effective leadership. Today, finding the right talent and creating a compensation and reward system to retain an organization’s brain trust is paramount. Cohen says that organizations are only beginning to grapple with this basic issue: "Who are the keepers and how do we keep them?" For many companies, the old-school belief that all employees should receive equal treatment is fading. "If you have limited resources, do you want to give everyone a 3 percent raise or do you want to reward your top performers with 7 or 8 percent and others with 1 or 2 percent raises?" Cohen asks. It’s also important to provide challenges and growth opportunities for these top performers, he says.

    For insurance and financial services conglomerate USAA, providing opportunities for top employees begins with recruiting but ripples far beyond. "The biggest challenge," says John Seybold, vice president of compensation, "is finding the right people with the right cultural fit." The San Antonio-based firm uses behavior-based interviewing techniques and pre-employment testing to improve the odds for a solid match. It also offers competitive pay, generous benefits and ample training and development opportunities for its 21,000 employees. For example, new hires at its call center receive three months of training before they begin handling phone calls. The company also uses a Workscape compensation-planning application to manage pay increases and bonuses.

    Some organizations, such as Boston Beer Company, the maker of Samuel Adams beer, are putting greater emphasis on rewards and benefits that boost morale. The 370-employee firm offers flexible scheduling and quarterly parties at the brewery, company-subsidized meals and home-brewing contests, paid adoption aid and a week of parental leave for workers with newborns. Employees get between 17 and 22 personal days a year, which they can use for any purpose--vacations, sick days or an opportunity to watch their child’s piano recital. "By eliminating questions about why a person isn’t coming in on a given day, we get rid of excuses and game-playing," says Jim Koch, chairman and founder. "We create an environment where employees act more responsibly and are treated with greater respect."

    In an era when most major companies already have automated recruiting, applicant tracking and performance management, the next frontier is to foster greater communication and trust. Remarkably, only about 50 percent of employees surveyed by Watson Wyatt say that they feel connected to their organization. Many have become disillusioned by ongoing layoffs, poor communication from the top and a general lack of trust. "In today’s environment, companies that do not provide the right rewards and opportunities wind up training their talent for the competition," Cohen says.

    Information and knowledge have always served as cornerstones for business success. But as the economy has shifted from an industrial base to a knowledge base, the stakes have grown exponentially. Today, gaps and deficiencies in skills and competencies translate into poor performance and an inability to compete effectively. Factor in decreasing loyalty, a moribund economy, a transient approach to employment and the lack of effective systems for lassoing knowledge when workers depart, and all the ingredients exist for catastrophic failure. "Companies are discovering that they must move from a job-based model of human resources administration to a competency-based model," Lawler says. "Those that can identify the skills and qualities needed for a focused business strategy are likely to come out on top."

    Although individual pieces of the puzzle in training and development have long existed--including classroom instruction, online training, applications for performance management and knowledge-management systems--it’s only now that organizations are beginning to integrate everything and assemble a meaningful picture of where they are and where they should be. At the same time, progressive executives recognize that it’s unwise to use the economy and the transient nature of the workforce as excuses to avoid the expense of training and development. "You can train people and they wind up leaving. But if you don’t train them and they wind up staying, you have bigger problems," Koch says.

    Of course, sagging profits and lagging budgets make the task all the more difficult. Yet the American Society of Training and Development reports that organizations with above-average training-and-development budgets outperform competitors and achieve a higher total shareholder return. Many firms, including Southwest Airlines, Dell and Viacom, clearly understand this concept. They have resisted the temptation to slash training-and-development budgets and have emerged from the economic malaise smarter and stronger.

    Others are figuring out how to integrate systems and strategies to produce superior results. In order to develop a smarter workforce, Inquisite Inc. has turned to performance management, focused training programs, informal brown-bag lunches and a knowledge-management application for its 100 employees that captures key information and makes it available to others. Workers can log on and find tidbits about subjects ranging from new information technology to an improved sales technique. "It’s essential to take a big-picture approach to organizational knowledge and competencies," says Inquisite president Meg Murphy. The data feeds into a competency-management system, which uses metrics to gauge employee performance and the justification for raises and promotions. "The goal is to prevent expertise from walking out the door with employees when they leave the company," she says.

    Not surprisingly, the effects of such a strategy can ripple into all corners of the organization, including recruiting, hiring and compensation strategies. "A competency-based system helps an organization achieve its goals, and when it is structured right, it rewards the top performers and keeps many of them from leaving," Lawler says. He believes that organizations must make competency-based systems a priority in 2004 and beyond. And while the technology and systems required to handle these tasks are crucial, success also involves effecting cultural change.

    "Too many managers are fearful that if they share knowledge, they diminish their market value or standing within the organization," Lawler notes. "It’s up to human resources to develop a new model that facilitates the transfer of knowledge and helps build a smarter enterprise."

Health care and a dose of reality
    Over the last few years, no issue has polarized employers and employees more than health care. Rising costs--and employers’ demand that workers shoulder an ever-escalating portion of the costs--have spawned nasty spats and prolonged labor strife. In Southern California this fall, bus mechanics, sheriff’s deputies and 70,000 supermarket workers have been out on strike primarily over health benefits. "In an environment where businesses have not been able to raise prices, they’re staring down the barrel of rapidly escalating health-care costs," observes Helen Darling, president of the Washington Business Group on Health, an organization that represents the health-care interests of large companies. "At some point, something has to give." A Kaiser Family Foundation survey shows that monthly premiums for employer-sponsored health insurance rose 13.9 percent over a recent 12-month period--the third consecutive year of double-digit increases and the highest premium spike since 1990. Today, Fortune 500 companies spend approximately $5,000 per employee per year on health care--more than double what it was a decade ago.

    The most frequently cited reasons for spiraling costs are employees’ overuse of the medical system--particularly when they don’t have to provide a co-payment or there is no deductible--an overweight, out-of-shape population and the rapidly rising cost of medical equipment and prescription drugs. On the front lines of business, it’s hitting employers hard.

    Telecommunications provider Verizon Communications, which manages health-care coverage for 900,000 active employees, former employees and dependents, will absorb a 14 percent cost increase while holding benefits steady for 2004. "We’re committed to offering high-quality health care, but we cannot foot the bill alone," says Bruce Taylor, director of employee benefits. The company has raised employee premiums in the past and will consider the option again, he says. At some point, it might also look at raising prices.

    It’s a similar story at Wheels Inc., a 550-employee firm in Des Plaines, Illinois, that had sales of $1.5 billion in 2002. Joan Richards, vice president of human resources, says that the automotive fleet and vehicle management company has increased some co-payments and deductibles in the past year. "We have to conduct quarterly reviews of our health-care costs to ensure that they’re not getting out of line," she says. "It’s an issue that demands a growing amount of staff time and resources."

    One way that Wheels has fought back is by providing free health screenings to catch medical problems early. More than 100 employees participate in a weight-loss and fitness program that offers rewards and incentives, including cash. The firm pays participants in a Weight Watchers program $1 per pound lost; another program netted the employee with the greatest improvement in cholesterol level a cash prize of $70. Finally, the firm has revamped its cafeteria and installed a salad bar. It also hands out free pedometers to employees so they can measure their steps at a lunchtime walking program.

    In the coming months, Darling says, frustrated workers will continue to feel the pinch in their pocketbooks and additional labor strife will likely erupt. The Kaiser Family Foundation notes that a few employers are now markedly boosting deductibles, whereas others are looking at alternative health-insurance arrangements. "It’s a problem that isn’t going to disappear anytime soon," Darling says.

Pressure to perform strategically
    In an era when finance, operations and sales use powerful reporting and analytics tools to make business decisions, many executives continue to rely on nothing more than hunches and intuition. Despite endless chatter about human resources increasing its level of accountability and emerging as a strategic resource, few organizations have taken any real action. "Too many executives either resist the change or aren’t equipped to deal with it," says David Link, VP, HR transformation practice at Cedar Group in Baltimore.

    That means attaching return-on-investment figures to projects, developing business metrics for gauging everything from worker productivity to benefit costs, and introducing applications for business intelligence and workforce analytics that can provide immediate insight into rapidly changing conditions. One organization that has gotten the message loud and clear is the state of Minnesota. The Department of Employee Relations, which supports human resources functions for various state agencies, is shattering the notion of government inefficiency. Not only does the department use standard tools such as a PeopleSoft HRMS and Resumix applicant-tracking system, but it has also taken data management to the next level with sophisticated reporting and analytics tools, including SAS workforce analytics and Crystal Decisions. "We are able to stay ahead of the curve rather than react to events when it’s already too late," says Cheri Hanson, DOER’s staffing supervisor.

    So far, DOER has been able to gain insight into the potential age and demographics of candidates and to fine-tune recruiting strategies appropriately. For example, when it determined that 30 percent of its staff would retire within the next 5 to 10 years, DOER began looking for ways to attract younger recruits (such as promising a strict 40-hour workweek), training existing workers to fill skill gaps and capturing the knowledge that resides in the heads of existing workers. It also has gained a far greater understanding of retirement trends, benefits costs and payroll patterns by slicing and dicing data. The end result has been productivity gains, cost savings and the ability to cope with a rapidly changing employment landscape. Combined with greater automation and work flow, it has enabled DOER to slash hiring from 110 days to 41. The time required for other processes has been trimmed by as much as 90 percent.

    A few organizations are pushing the boundaries even further by holding human resources accountable as a cost and profit center. In some cases, that means attaching "prices" to various services and generating a P&L statement. In other instances, organizations are turning to a "balanced scorecard" approach that indicates what the company should measure in order to understand the financial ramifications of any particular action. Within many organizations, human resources executives must carry their full weight at board meetings and executive planning sessions.

    Whatever tack an organization takes, one thing is certain: "It’s no longer possible to avoid hard numbers," Link says. "Just as the manufacturing part of an organization can measure costs and margins down to a hundredth of a cent, so must human resources when measuring people. It’s no longer acceptable to claim that metrics do not exist. It’s up to human resources to find them or create them."