Economic downturn is masking longer-term talent shortages and demographic shifts

A critical element of business success is ensuring that a company has the right number of employees with the right skills in the right place to execute the business strategy. Without the appropriate workforce, a company cannot compete. Workforce planning is recognized by many organizations as an indispensable part of being competitive, enabling a company to analyze its future workforce needs against its internal and external labor markets to identify potential shortfalls and to design interventions to fill the gaps. During recent boom times, when many companies faced talent and skill shortages, workforce planning was critical in helping organizations prepare for their workforce needs going forward.

But in today’s economic climate, is workforce planning still a necessity? To some companies, forced to make layoffs and aware of high unemployment rates, it may seem as if talent shortages are a thing of the past and that now the focus should be on cost cutting rather than on workforce planning and development.

The truth is, though, that while the downturn has affected how companies approach workforce planning, it has also made this process an even more critical component of future success. The global economic recession and the apparent talent surpluses it has seemed to create are simply masking long-term talent shortages – shortages brought on by shifting demographics and aging workforces – that will take center stage again as the economy recovers (See below “The underlying issues ”). Moreover, the much greater uncertainty in today’s business environment actually increases, rather than decreases, the need for rigorous, numbers-driven workforce planning.

Helping companies navigate the changing environment

Many companies today are finding that the downturn has put their longer-term talent needs in direct conflict with short-term business requirements. In the long term, they expect growth, which generally requires an increase in the workforce. However, many are facing the immediate need to cut costs – including labor costs. So whom should they cut today, knowing that in the future the business will require growth – and especially certain critical skills and capabilities – to prosper? The organizations that can successfully answer this question understand the workforce segments that are necessary to their success, the supply of this talent inside their organizations and the availability of this talent in the external labor market – and are bringing this information to bear in the development of detailed workforce plans.

Exhibit 1. The key elements of effective workforce planning

Workforce planning enables managers to identify their choices and make smart decisions so that the actions they take today do not jeopardize the company’s future viability. Despite the current need for layoffs, long-term demographics indicate that companies will be struggling with talent shortages – particularly in terms of the availability of skilled workers – for a long time to come.
 
In addition, smart companies are using workforce planning techniques to help them understand the impact of short-term talent reductions on the demographics of their internal labor market. For example, if a company makes most of its cuts from the bottom rungs of the organization, it could wind up with a disproportionately older workforce than it had before. In contrast, if it cuts primarily from the middle, it could lose an important cadre of skills and future leadership. If it cuts primarily older workers, it could be losing considerable experience and knowledge.

By helping companies understand the underlying dynamics of their internal and external labor pools, workforce planning also enables companies to grasp the limits of using headcount as a variable cost that can be cut to keep overall costs in line. For example, while overall costs may need to be cut by 5 percent, the company that understands the demographics of its particular labor market may conclude that cutting more than, say, 3 percent from its workforce would jeopardize its long-term viability, leading it to seek the additional cost savings elsewhere.

Rigorous workforce planning has also become that much more important to company success, given the increased uncertainty in the business environment. Unable to rely on any previously established glide path with respect to future workforce needs, companies now have to establish and test new assumptions about the quantity, quality and location of talent they will need as they move into the future. Given the market’s ongoing volatility, this includes preparing for a wider range of future scenarios, including those in which their businesses shrink or move to new locations.

Workforce planning helps organizations prepare today for the talent risks that are likely to materialize when the recovery comes. For example, organizations are likely to see a spike in the number of employees who jump ship when the economy improves, potentially leaving the organization understaffed. On the other hand, companies may also experience talent bottlenecks if workers who had planned to retire cannot afford to do so now due to diminished retirement account balances. This “bubble” of older workers may benefit the company in some ways, enabling it to hold on to a group of seasoned workers whose skills may be difficult to replace. However, it may also prevent people from rising from below, creating turnover at lower levels of the organization.

Workforce planning can also help companies look for “choke points” in their talent pipelines. In some companies, the bottom of the pipeline may be healthy because of existing talent or the ability to hire, and the top may be fine because people are not retiring or leaving, but the middle may get narrowed down through attrition or reductions in force, so the company’s future talent supply is in jeopardy. Planning for these longer-term risks can help companies better fulfill their workforce needs in the future.

Keys to getting workforce planning right

Successful workforce planning in today’s uncertain environment requires an even greater degree of preparedness and flexibility than was necessary in the past. First, companies should prepare for multiple future scenarios and create workforce plans that reflect these different possible futures. These scenarios need not be limited to projections for next year, but can look up to five years out, involve multiple growth scenarios (including negative growth), and involve a variety of potential future locations. This is consistent with the World Economic Forum’s recommended approach of considering multiple scenarios to test the robustness of policies against uncertain futures.

Second, while projections can be aggregated to the total workforce level for purposes of planning, the most successful planning will involve projections for specific segments of the workforce whose skills are most critical to the business. It is critical to drill down to the level of particular skills, job families and organizational levels when developing the workforce plan, because the labor market for each segment and the importance of each segment to future business growth are so different.

Third, as critical as good planning is, it will also be important for companies to remain flexible as events unfold in the larger environment. Success may require companies to revise their plans frequently to adapt to circumstances in the business and labor markets. For example, the Forum report effectively predicts that there will be more older workers in the total workforce over the next several decades. As environmental changes occur, workforce planning can identify and capitalize on these available talent resources, leading to adapted workforce programs and practices to attract and retain older workers.

Finally, real-time information about the workforce will enable organizations to respond to changes in the business environment and within the workforce. Forward-looking companies are already using tools such as human capital dashboards to put powerful, up-to-date human capital information at the fingertips of managers. These dashboards, which are able to recalculate and refresh data on a regular basis, not only keep managers aware of changes that affect workforce plans, but can also be used interactively to enable managers to test different potential actions. This is a powerful functionality in today’s uncertain environment.

Conclusion

While many companies recognize the power of workforce planning in a strong economy, some have discovered its even greater usefulness in these troubled economic times. By using the tools and techniques of workforce planning, these companies will find it easier to make the talent choices they have to make today without losing sight of the long-term implications of those choices or the potential future needs of their businesses. These are the organizations that will be best positioned to succeed through demographic change and economic uncertainty.