Talent Management: How to Invest in Your Workforce

An exclusive study from IBM and Human Capital Institute finds nonprofits and midsize companies coming up short in employee management

by Douglas MacMillan

The war for talent. The coming brain drain. Mismanaged succession. In recent years, judging by steady increases in spending on talent management, workforce challenges like these have become top of mind for most companies, large and small. But what is the most productive way to invest in your workforce, and what are the chances you will see a tangible return?
A new study conducted jointly by IBM's (IBM) Institute for Business Value and Washington-based think tank Human Capital Institute (HCI), and shared exclusively with BusinessWeek.com, has yielded promising answers to those questions.
Last spring, researchers from IBM and HCI surveyed 1,900 professionals in over 1,000 public- and private-sector companies, from a range of industries, geographies and organizational sizes. Respondents scored their companies in 30 specific competencies, which fell into six key practices of talent management: strategy development, attracting and retaining, motivating and developing, deploying and managing, connecting and enabling, and transforming and sustaining.
Companies with high scores across the board were more likely to have strong financial performance, based on reported change in operating profits between 2003 and 2006. "It's not the first research to show a correlation between talent management and financial results," admits Allan Schweyer, executive director of HCI and one of the authors of the report, "but it's one in a handful, and I think it really adds to that body of evidence that is helping organizations to build a solid business case for investments in talent management."
Planning Ahead
Organizational size was a main difference-maker between companies that did well on the survey and those that did poorly. Researchers found that large companies—defined as having 10,000 to 50,000 employees—do not only manage their existing employees more efficiently, but they are better equipped to plan ahead for the number of people and types of skills they will need to bring into their organization in the future. "Smaller competitors who haven't done this work really scramble in a lot of cases when it comes to filling holes in their workforce," says Schweyer.
Large companies outperformed the total sample by 4% in linking workforce-management strategy to business strategy, and by 7% in having metrics that provide input into strategic workforce planning decisions.
Yet small companies do have the advantage of being nimble and able to manage their workforce on an intimate, informal level. Organizations with fewer than 1,000 employees were 4% better than the total sample at collaboration and sharing knowledge, 6% better at promoting virtual working, and 4% better at identifying relevant skills.
Surprisingly, medium-size companies—between 1,000 and 10,000 employees—were less likely to have implemented five out of the six talent management practices in the study. At that size, says IBM associate partner Eric Lesser, "you're too small to do it by yourself but perhaps haven't built the infrastructure or managerial focus" that larger companies have. Lesser and the other authors of the report termed these companies "organizational adolescents" that have growing pains because they are unable both to diagnose issues and keep a long-term perspective.
Major differences between industries also emerged in the report: Knowledge-intensive businesses tended to focus on development and collaboration, while service-intensive ones emphasized employee attraction and retention. All nonprofit industries studied—government, education, and health care—lagged behind the private sector in virtually all areas of talent management.
The best way to invest in talent management depends greatly on the size and industry of a company. And there's no easy fix for the human resources woes that are becoming more common in all business.
But for those looking to link talent to profits, there were two competencies that a majority of the best-performing companies had in common: understanding and addressing workforce attitudes and engagement levels; and aligning employee incentives with appropriate business goals