Autumn Leaves

Autumn Leaves

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Autumn Leaves

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    • RainerStrack
    Düsseldorf more about Rainer
    • Jens Baier
    Düsseldorf more about Jens

    • Companies must prepare for the loss both of productivity and capacity they will experience as their work force ages and retires.

    • Demographic risk management has to become an integral part of yearly strategy and planning discussions.

    • By plotting demand for employees against the supply of non-retiring employees, corporations can anticipate gaps in their labor needs.


    Our work forces are getting older, but we are not yet responding adequately. If your “dashboard”— that picture of financial and management metrics that you expect your top team to have on their desktops—doesn’t contain information about your company’s demographic risk broken down by job category, you need to get that information and use it.

    Demographic risk is the potential loss of productivity and capacity that your company will experience as your work force ages and retires. It brings two challenges: management of an aging work force and management of capacity losses. Why should you watch both aspects of demographic risk? Because in many industries and in many companies it is becoming an existential risk: if you fail to manage it actively, there is actually a good chance that your company will not survive. Isn’t it ironic that, at a time when workers worry that their jobs may be outsourced to China and India, many companies are recognizing that they will soon have the opposite problem? They will have a shortage of workers in skilled jobs that cannot be moved abroad.

    Location, Location, Location

    Watchmakers spend years training to repair expensive mechanical timepieces. A shortage of watchmakers exists today in the West—the effect of inexpensive battery-powered watches and an aging work force. This shortage could theoretically be alleviated by tapping into the supply of labor in places such as Bangalore. But for services like watch repair and many others, demand must be satisfied locally. People will not ship their watches to India for service. Nor can Western utilities generate power in China. Transportation companies must carry freight on local roads, rails, and waterways. Hospitals need nurses on site. Oil refineries need petroleum engineers at the plant.

    Rather than anticipate demographic risk, we exacerbate it. Consider one example. A utility restructured and reduced its work force several times over the last ten years—providing incentives to encourage older employees to retire early. When executives finally decided to treat demographic risk like other business risks and analyzed the data, they realized that the percentage of employees over age 50 would rise from 18 to more than 50 within just five years; and in some job categories, it would rise even more. This is not unusual. In fact, employee surpluses will often turn into massive shortfalls just beyond the typical planning horizon. (See the exhibit “Demographic Risk Management Has Two Facets.”) A U.S. transportation company came to that conclusion when top management discovered that about half of its best sales executives were between the ages of 55 and 65. In both companies, it may not be necessary to keep all those executives. But you should know which ones you do need and make sure to conserve their tacit knowledge.

    De-averaging Demographics

    While it may be helpful to track the development of the average age of your work force for the next five to ten years, you will gain far greater insight if you de-average your work force. You will need to look at each location and at each job category to derive concrete action steps.

    The utility conducted this kind of analysis and found that some locations would have a labor surplus over the next ten years while others would have a shortage. The same pattern of surpluses and shortages was evident within different job categories. But the analysis of actual work-force development over the next few years—taking retirement and attrition into account, as well as possible hiring scenarios—told only one side of the story. The utility then needed to forecast demand for staff over the next five to ten years for each job category. Although this may seem like an impossible task, it is both conceivable and necessary. In your finance department, investment decisions are based on calculations that look out 10 to 20 years. Why not do the same in the HR department? In most industries, demand for staff flows from strategy. The demand for staff at a power supplier directly depends on the company’s power-generation strategy—which power plant, which block is hooked up. In the automotive industry, product strategy largely drives work force needs.

    This analysis of both supply and demand must be done by job category. You can work with three kinds of categories—namely, job functions, job families, and job family groups—to understand how fast you need to move. A good way to think about these categories is that employees can move between jobs in the same function with 3 months of training or less, within jobs in the same family with less than 18 months of training, and within family groups with up to 3 years of training. With this granular level of understanding, you can now identify the most critical jobs in your company where you should start your demographic risk analysis.

    There is a real leadership challenge here: to merge humanism and microeconomics and, in so doing, change the future. By plotting demand for employees in specific locations and job categories against the supply of nonretiring employees, corporations can anticipate gaps in their labor needs. Your management team will need to spend most of its time in those areas of anticipated shortages where demand for talent will be especially intense and where you anticipate intense competition in the labor market.

    With the help of the job category structure, a company will know exactly which jobs will likely have surpluses and which will have shortfalls. It can start preparing transfers from surplus to shortfall areas across business units and locations, and with the help of a qualification program within job families. For some jobs, companies will need to tap the labor market instead of looking internally. To have a world-class recruiting approach, you should address the labor market with the same systematic and farsighted analysis that you apply to your internal work-force needs. That means establishing welldefined recruiting segments on the basis of job categories, planning target sources such as specialized schools and training centers for each category, and defining a recruiting and marketing approach for each channel.

    When recruiting is necessary, we advocate shooting birds with cannons. Otherwise, you will not find the right people with the right skills. Consider the resources spent on development measures and severance payments, and, most important, the strategic advantage you ultimately receive by hiring the right people. When qualified candidates do not exist, you must become creative. Breitling, Swatch, and Rolex, for example, are helping to fund programs in the United States to train watchmakers. If you anticipate and start implementing a recruiting strategy in certain job categories while your competitor is still reducing head count, you will gain a clear competitive advantage.

    Managing Aging

    As a growing number of employees near retirement, we will also need to discover innovative ways to manage productivity and motivation. For instance, as workers age, they take more sick time. As a result, preventive health management initiatives may make sense in areas where capacity is especially tight. Companies must find new ways to encourage older workers and make sure that they pass along their knowledge, solving two problems at once. Mentoring, “shadowing,” and other knowledge-transfer initiatives can give older employees a sense of belonging. In fact, as employees grow older, the value they add can either increase or decrease significantly, and this may vary by job category. In many cases, when manual labor is involved, it is possible to prevent a reduction in older workers’ productivity by enhancing workplace design or revising duties. Once more, the job family structure can help you derive concrete action steps.

    In many companies, there is a close correlation between pay and length of service, and thus age. Like it or not, you may need to start linking compensation more closely to performance rather than longevity. You may also need to start thinking about making changes in your retirement plan to account for demographic risk.

    Leaders of companies in developed countries can and must prepare for the aging of their work forces. An element of uncertainty exists in making projections. Who will retire early? Who will want to stay on? What technological breakthrough will make certain jobs obsolete? Uncertainty is not an excuse to do nothing. As with all strategic decisions, it is a challenge.

    Now is the time to act and turn an existential risk into a competitive advantage. Demographic risk management has to be an integral part of a yearly strategy and planning discussion.

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