Talent strategies: Why are

companies ill prepared?

Extracts from presentation given at AESC Conference

Nicolaus Henke (London) & Bernd Uhe (Geneva)

December 2001

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or
reproduced for distribution outside the client organization without prior written approval from
McKinsey & Company, Inc. This material was used by McKinsey & Company, Inc. during an oral
presentation; it is not a complete record of the discussion.
Our messages today

1) The war for talent is not about cyclical ups and downs, the
basics haven't changed

2) Talent imperatives are clear - but are companies acting?

3) Deeply rooted road blocks, which however can be overcome

4) The executive search could be a key player to lead the

transition

1
1) The war for talent is not about
cyclical ups and downs

• Executive Search industry enjoyed exceptional growth during the

frenzied recruiting market in the late 1990s
• Cooled economy caused hiring freeze
• However, fundamental trends are still in place:
– Long-term productivity growth trend
– Differential value of better talent is escalating in the knowledge
economy
– Underlying trends such as demographics, mindset changes, or
new working/employment models are drivers

2
The good news: long-term, productivity
growth matters, not cycles
Contribution to 1995 US productivity acceleration, CAGR, percent

0.07 0.01 2.4

0.12
0.17
0.25
0.34
0.37

1.00

Produc- Whole- Retail Security Electronic Industrial Telecom Net of Produc-

tivity sale trade and and equip- services 53 other tivity
growth trade (incl. rest- com- electric ment sectors growth
1987-95 aurants) modity equipment (primarily 1995-99
brokers (primarily com-
semicon- puters)
ductors)
Source: McKinsey Research 2001 3
Product, service, and process innovation
continue to generate productivity growth
Percent, 1987 = 100%

Productivity

CAGR
99-04E
+1.2%

CAGR
95-99
+2.4%
CAGR
100% 87-95
+1.0%

1987 1995 1999 2004

Source: McKinsey Research 2001 4

Intangible assets are an increasingly
important source for value creation
S&P 500: Market to asset replacement value

Increase in Tobin’s 'Q' ratio

3

2.5

1.5

1
Average
0.5

0
1945 1959 1973 1987 2001*

Source: www.valuingwallstreet.com (estimate as of 15.10.2001) 5

The differential value of better talent is
escalating in this knowledge economy
Diminishing in Talent and knowledge
relative increasing in relative
Industry performance importance (examples)

Analysis of complex data, meeting

Transaction
Banking needs of increasingly sophisticated
based fees
customers
Distribution Expertise in customer insights (e.g.,
Retail
facilities preference data, segment demand)

Printing Quick access to high quality news.

Publishing
equipment Superior information creation
Better insights/foresights on
Pharma- Access to capital,
opportunities, superior innovation
ceuticals economies of scale
and marketing competences

Physical assets, Strategic insights/foresights, e.g.,

Petroleum
access to capital in estimating segment potential
and contracting 6
What will drive the market for talent
in the next decade (1/2)?

Demo-
• Irreversible demographic trend shows that number of
35-45 years olds is shrinking in countries with no
graphics
significant offset apart from immigration
• Growing number of older people (>50 years old) will
work on a part-time, temporary or consulting basis

• Global mobility of talent, with tendency to be

Mobility "company mobile" but "geographically loyal"
• Technology will strongly increase supply/demand
transparency and fundamentally change how talent is
bought/sold (monster.com as tip of the iceberg)
• Inflow of young talent from developing world
• From "tenure in a job" mindset to "assignment
Mindset mentality" and personal growth

7
What will drive the market for talent
in the next decade (2/2)?
• Specialized knowledge as the competitive edge
Knowledge • Talent as the source of innovation
• Managerial jobs more challenging than ever based
on cross-functional knowledge leadership
requirements, technological pace, etc.

Working
• Individuals will become freer agents, working for
themselves and will be bidding their services to
models
attractive buyers
• Individuals will not necessarily serve one employer –
as you do not only serve one client
• Number of full-time employees might significantly
decrease
• New organization models like network based
structures will support free agent model
8
Implications for companies?

We believe that 5 talent imperatives are critical

1. Embrace a talent mindset

2. Craft a winning employee value proposition
3. Rebuild your recruiting strategy
4. Weave development into your organization
5. Differentiate and affirm your people

Source: McKinsey WFT Studies 2001 9

2) Companies clearly recognize the talent
shortfall they face
Percent of all respondents who strongly or Strongly agree
somewhat agree Somewhat agree

"Overall we have a strong talent pool

in our Top 200 positions" 18 57 75

"Our company has enough talented

managers to pursue all or most of its 7 37 44
promising opportunities"

"We are confident that our current

actions will lead to a stronger talent 9 42 51
pool in the next three years"

Source: McKinsey WFT Studies 2001 10

Business strategy should be linked to
talent strategy … but is it?
Percent of corporate officers and senior executives who strongly agree

62

Important to Their company

link business actually does
strategy to this
talent pool
requirements

Source: McKinsey WFT Studies 2001 11

But are completely ill-prepared on the
basics – a snapshot
Percentage of top 200 executives who strongly agree that
their company is effective in…

Recruiting Development Retention

19 3 8

Identifying C Shifting C Deliver

players players good EVP
16 3 23

Source: McKinsey WFT Studies 2001 12

Why do companies tend to overrate the
quality of their talent pool?
Performance distribution of Top 200 in annual review Typical client example

Performance
rating 2001
Probable correct
distribution

43%
40% Limited
calibration…
…limited
actions…
… despite
8%
7% tremendous
2% consequences
for the company
Strugglers Meet all Stars
expectations
Source: McKinsey WFT Studies 2001 13
Keeping under-performers is very costly

Of the employees surveyed who worked

with an under-performer . . .
“It made me want to leave the company” 86%
“It prevented me from making a larger contribution” 82%
“It hurt my career development” 81%
“It prevented me from learning” 76%

However, required actions are rare:

"Our company is actively moving under-performers 7%

out of the company or into less critical roles"

Source: McKinsey WFT Studies 2001 14

Recruiting: Why do most companies
merely try to fill positions?
Percent of all respondents who strongly agree

"We have enough talented

managers to substantially While talent needs
increase our performance 11
seem to be obvious…
relative to competitors"

… most companies
"Company always looks seem to recruit only
for talent, even without 8
when they have an
concrete openings" opening

Source: McKinsey WFT Studies 2001 15

Missing accountability for people
Percentage of corporate officers who strongly agree
78

"Should line
managers be
accountable for the
quality of their
people?"

Believe this Think their

philosophy companies
actually do this

Source: McKinsey WFT Studies 2001 16

3) Deeply rooted road blocks …
• No urgency, since true
economic impact of talent
not transparent
• Hesitation to make big
• Products and Strategy strategic choices for talent
budgets have reasons (e.g., location)
priority over • Lemming's behavior
people
Behavior Systems
• Difficulty to
give negative
feedback (self-
protection, no • Longer-term talent plan unknown concept
language, etc.)
• Low incentives to attract and develop people
• Potential longer time to impact (e.g., talent
development actions)
Source: McKinsey WFT Studies 2001 17
Some potential actions
• Assess the talent gap
• Understand/ • Develop talent strategy
measure
alignment (e.g., • Pick your battles
with McKinsey • Consider tough choices (e.g.,
'myworkplace' Strategy re-location, enter/leave
tool) businesses for talent reasons)
• Leadership
signals and Behavior Systems
moves
• Make every
executive
search for great • Measure talent economics
talent all the • Change incentives
time

Source: McKinsey 2001 (WFT Studies) 18

4) The executive search industry could be a
key player to lead the transition
• Can you be the key thought partner to CEOs to find answers on:
– Knowing for all key jobs what a gold standard looks like
– Looking beyond people who have done exactly the same job
before
– Diagnosing and help change job specific EVPs
– Helping to move on C performers
– Improving their recruiting processes
– Measuring talent economics
• Should you invest more to:
– Define what the gold standard in specific jobs looks like
– Proactively spot the top decile value creators,
– More actively propose bench improvements to your clients?
• What is the opportunity to build a business to know and and be the
agent of the top decile value creators in pivotal professions?
19