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How Talent Management Drives Financial Performance

As the talent management software market continues to grow (Oracle, SAP, Workday, IBM-Kenexa, ADP, CornerstoneOnDemand…) more and more companies are biting the bullet. Our research shows that the talent management software market has grown to well over $4 billion and will grow at more than 15% this coming year. Businesses are in the middle of replacing billions of dollars of HR software with new cloud-based systems.

(Look at the Workday IPO if you want to see how hot this market has become.)

What are Companies Getting for all this Software Investment?

Companies are converting from on-premesis to cloud-based HR software in droves. Nearly every major client we talk with is considering some replacement of their existing HR software with one of these new integrated systems. But is it driving results?

We’ve looked at the impact of new software systems for years, and sure enough, it is not the software itself that drives business improvement. Rather it is the forced re-engineering of business processes. (People in the ERP market have known this for years.)

What this means is that buying HR software sometimes creates business improvement, and sometimes it doesn’t.

A Maturity Model for Talent Management

Let’s look under the covers.

Corporate talent management is complex. We’ve uncovered more than 60 different processes which impact organizational performance (everything from pre-hire assessment to talent calibration).

To help figure out how this all works, we put together a maturity model which helps you figure out where your organization fits).

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Over the last five years we’ve analyzed more than 600 different organizations, correlating their level of maturity against a variety of business outcomes.

The findings give you a great appreciation for the importance of strategic HR programs.

1. Companies with level 4 talent programs generate 26% greater revenue per employee than their peers.

2. Companies with level 4 talent programs have 40% lower voluntary turnover among high-performers than their peers.

3. Companies with level 4 talent programs were 28% less likely to downsize during the 2008 recession… and…

4. Companies with talent management software are likely to be 11% higher on the maturity model.

Is Software a Driver or an Enabler?

The research shows is that software alone is not the answer; rather the implementation of HR software, when done well, often forces the company to re-engineer and better integrate its talent program.

For example, one of our clients is a large global high-technology manufacturer. This particular company implemented an integrated talent management system almost 8 years ago, and was often featured by vendors as one of the leaders in “top-down goal management.”

Companies like SuccessFactors have been promoting the use of goal management software for years now, and this initiative has become a common business case for the implementation of these tools. Today goal management software is almost a commodity (nearly every HR vendor offers such tools). And now companies like Salesforce.com are now embedding it right into work.

What Drives Financial Returns?

In the case of the company mentioned above, they gained great alignment for the first few years, but over time the “goal setting” process became institutionalized and bureaucratic. Rather than focus on making goal-setting a dynamic, business-centric process, it became an HR compliance program. Today the company is dismantling the program and re-engineering it in a more agile way.

Our research in goal management, for example, shows that companies which revisit their goals quarterly generate nearly 3X the return of companies that implement top-down goal management annually. So if you buy software which makes this difficult, it’s probably getting in the way.

We also found, for example, that among all the 60+ practices you can implement to drive organizational performance, one of the most valuable of all is development planning.

Development planning? Most people remember this as a little box at the bottom of an annual appraisal which asks “what training would you like to complete in the next year.”

Well when it’s done well, development planning is a highly strategic process – one which looks at skills supply against skills demand, and helps managers and employees plan their careers in a dynamic way. Not as easy as simply implementing a software system. And here too, most HR software provides varying amount of support.

Focus on the Process, not the Tools

As the HR software market gets bigger and frothier (many of thees vendors are trading at 15-20 X revenues), it’s important to remember that companies drive financial value through management, not tools. While HR software has enabled organizations to implement tremendous new solutions, ultimately results come from the design and implementation of sound and relevant management practices.

Human Resources has become a very important profession. Software is important, but it’s not the whole answer.

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Josh Bersin, Contributor
I analyze corporate HR, talent management, and leadership.

http://www.forbes.com/sites/joshbersin/2012/10/19/how-talent-management-drives-financial-performance/