Q: What are some of the key human capital challenges facing organizations in Turkey today? Are these challenges unique to Turkey?

Hakan Hizar: It is impossible to talk about human capital in Turkey today without talking about how the global financial crisis is affecting Turkey as a developing economy. While Turkey has a very strong banking system because of recent regulations, the crisis is being felt through a weakened demand for goods and services. As a result, HR departments have had to reduce employment costs, in part through layoffs, and the unemployment rate in Turkey is rising. By the end of 2008, the unemployment rate reached 13.6 percent compared to 10.6 percent as of December 2007. So the impact of the crisis on employment is one major challenge.

Another big challenge for HR is the tension felt in organizations after so many jobs have been eliminated. Many companies are dealing with the survivors. Given the uncertainty of the economic situation, engagement and motivation are becoming bigger problems every day. In addition, incentive and base pay increases have been canceled or delayed in most organizations because of the uncertainty, adding to these engagement problems.

Sibel Yucesan: I would like to add that a few of the challenges from the last two or three years are specific to Turkey. Turkey has a rather young population – 50 percent of the population is under age 25 – and these younger workers have a big appetite for training and development. So making the right investment decisions around learning and development has been a challenge for HR departments. This is part of a larger talent management issue, because if you look at the percentage of the workforce that is well-educated, you will see that the supply still does not match the demand. For example, the percentage of the workforce able to speak a foreign language proficiently is not that high. So the biggest challenge is the competition over talent.

This is further complicated by the economic situation today. On the one hand, Turkey has always had high inflation compared to Europe. So the cost of retaining key talent is rising, and there is a push to make cost-of-living adjustments. In some industries and for some management level positions especially, companies are competing with the salaries offered in some Western European countries. On the other hand, in trying to retain key people, companies this year are also dealing with the economic crisis and the resulting focus on cost cutting.

Q: Are you seeing many foreign companies expanding into Turkey? How are their human capital challenges different compared to companies that are based in Turkey?

SY: Turkey has recently become a center of attraction for foreign capital, drawing $20 billion in foreign investment over the past five years. Although we expect a drop in foreign investment in Turkey in 2009, this recent investment has contributed to the war for talent. In the past, multinationals offered much better employment conditions than local companies. But big local companies are now trying to attract the same caliber of people by offering the same level of compensation packages and employment conditions. So the talent war has become bigger and bigger.

HH: While there are no major HR issues particular to multinationals in Turkey, they do face a few unique challenges. First, some multinationals have centralized systems for managing costs and human capital, which reduces their flexibility in adapting HR practices to local conditions. For example, in some organizations, our local contacts are complaining about the difficulty of differentiating performers without having more flexibility.

Second, some multinationals are working with expatriates, and the cost basis for expatriates is higher. However, this is affecting fewer and fewer companies, because most multinationals today prefer to work with Turkish professionals, even for top management positions.

A third challenge for multinationals arises from the fact that most of them enter the market through mergers or acquisitions, which means that they have to deal with the problems that often arise from these transactions around harmonization of compensation, culture and communication. These are additional challenges for HR that the local companies do not have.

Q: How aggressively are major Turkish companies expanding outside of Turkey? How does this affect their human capital challenges?

HH: Turkey is a developing economy, so we don’t have too many multinationals and international brands. Businesses in Turkey largely have been structured as conglomerates with diversified operations in many fields. For example, a big local holding company may have operations in banking, durable goods, manufacturing and food production. Up until recently, these local companies focused on the local market only, but during the last decade there have been several successful attempts to become global, or at least regional, organizations.

Because it is a new experience for many Turkish companies to work with a foreign workforce, this has been a major challenge for HR. They are in the learning stage of the process. Other challenges include building HR systems able to cover all of their subsidiaries across multiple countries and working with multicountry HR data, particularly for those organizations that have operations in neighboring countries in Eastern Europe, the Middle East and the former Soviet Union. These are difficult markets in terms of data availability.

Q: How are companies addressing these human capital challenges? What actions are they taking?

SY: The solutions are quite similar to those employed in the rest of the world. At the beginning of the economic crisis, companies tried their best to find alternatives to laying off people, but industries that are highly dependent on exports, such as textiles and automotive, were hit badly and HR hasn’t been able to avoid having to reduce the workforce. Employment regulations in Turkey give organizations some flexibility in taking alternative measures before making difficult reduction-in-force decisions, so HR also has been implementing pay freezes, cost of living adjustment freezes, delays in pay increases, reductions in or cancellation of incentive pay, shorter work hours, and mandatory use of paid or unpaid vacations.

Q: Are companies taking steps to attract and retain critical talent, even in the midst of this crisis?

SY: Of course, companies still face long-term talent issues. But for now, companies have really been focusing on the immediate crisis. However, management realizes that once economic conditions change, they could lose their critical talent. So HR departments are really struggling to balance this short-term focus on cost reduction with the long-term focus on talent management.

Q: Are HR departments in Turkey prepared to deal with these challenges effectively?

HH: We have very well-trained, well-educated HR people in Turkey. A lot of investments were made in the HR profession over the last 20 years. One reason for this investment was the increasing number of multinationals with advanced HR practices. However, large local conglomerates with centralized HR functions also invested heavily in developing multiskilled HR professionals for their diversified operations. In addition, with the increasing popularity of the function, many well-educated new graduates decided to make a career in HR.

Turkey has also lived through several economic crisis periods over the last two decades, which means that we have managers who are very experienced in handling crises, not only in HR but also in finance, general management, manufacturing and sales. These difficult times added a lot to the accumulation of know-how and knowledge in HR management. So even though the nature of the crisis might be different now, it is not a problem of not being prepared. The major disadvantage is that long-term HR programs must be put on hold to deal with the crisis.

Q: What do organizations in Turkey need to do differently if they want to be successful in managing human capital?

SY: Over the last 30 years, Turkey has experienced high inflation. While it has hovered around 10 or 12 percent for the last four years, it was previously around 60 or 70 percent. As you can imagine, the focus for companies in a country where there is always high inflation has been mainly on short-term policies and solutions. What we are now suggesting to companies is that they take a much longer-term view, although this is of course very difficult during this unprecedented time. But we believe that HR could play a more strategic role in aligning human capital solutions with the business itself.

Another thing we’re recommending is that companies do a much better job of segmenting their workforce, which is critical in terms of talent management. Right now, companies rarely use segmentation, but not all employees should be treated in the same way.

Finally, we believe that HR must get better at data-oriented HR management, because data is much more valuable now and is going to be even more valuable in the future. This is the new environment that companies will be operating in beyond the crisis, so they need to know how to collect data, how to work with data and how to study data to develop smart solutions.

HH: We were talking with a top manager at one of the conglomerates who was saying that it’s a new world and all major assumptions have changed. In this new environment, HR needs to reposition and redefine its contribution to the organization. While cost management has always been critical for HR, a cost-benefit balance will be more critical in coming years. Also, going forward, long-term target setting and the associated reward practices will be important discussion points for HR people in Turkey.