What Peter Cappelli contends that HR could—and should—learn from the procurement department.
By Russ Banham
He’s considered one of the world’s most influential theorists about human capital at work, a visionary thinker who predicted the credit crunch’s impact on employment well before it snapped, crackled, and popped. Peter Cappelli’s books and lectures take on the subject of the corporate workforce—what it was, is, and should be.
His ideas, once viewed as borderline revolutionary, no longer seem all that radical. Such is the case with Cappelli’s book, Talent on Demand: Managing Talent in an Age of Uncertainty. Cappelli wrote the book in 2007, before the recession kicked into gear. Since then, unemployment has soared, making Cappelli’s predictions of a workforce managed like a “just-in-time” supply chain eerily prescient.
A former Fulbright Scholar, Cappelli is the George W. Taylor Professor of Management at The Wharton School of the University of Pennsylvania and director of the Wharton Center for Human Resources. He is also a research associate at the National Bureau of Economic Research and currently serves on commissions for the World Economic Forum, the U.S. Department of Labor, and The Business Roundtable. His wide-ranging global posts have run the gamut—from senior advisor for employment policy to the Kingdom of Bahrain, to Distinguished Scholar of the Ministry of Manpower for Singapore.
In his recent book, Cappelli argues for a new way of managing talent, one borrowing from supply chain management and portfolio diversification methodologies. “All successful planning begins with an understanding that the future is uncertain,” he says. “Rather than assume one thing or another will happen, you need to get a feel instead for the uncertainty. Typical models for forecasting human capital needs are based on forecasts to determine the single most likely outcome, but in many cases this is not particularly useful, since the single most likely outcome isn’t likely to be that. What’s more important is to know the second and third most likely outcomes, which is really a recognition of uncertainty.”
As an example, he cites the practice of succession planning. “It’s an attempt to find the right person today to fill a particular job five years from now, and then grooming this person accordingly,” says Cappelli. “But, this assumes you know what the job will be like in five years and that this person will stick around for it. Some jobs will change, some may no longer be needed, and the person you’re grooming may go elsewhere in the interim. Essentially, similar issues confront organizations in a supply chain context, where you’re constantly trying to match supply to an uncertain and changing demand.”
Talent on Demand makes the argument that the succession planning model created a half-century ago no longer is practical as a way to staff and deploy talent. As Cappelli sees it, the ultimate goal of talent management is not to develop people—it’s to make money. By applying supply chain management methodologies to hiring practices, a company can do just that. “Everyone is chasing the postwar, bureaucratic General Electric model where you hire people and then slowly develop and promote the best ones, but this assumes you can plan the future, knowing what the business will be in five or 10 years and that these people will stay with you,” he says. “If you don’t know what products or services your company will need in five years, how can you know how many staff members you will need?”
Given the ubiquity of the uncertainty, “the model doesn’t hold up,” he asserts. “In fact, it’s worse than having no model at all, since you’re making big investments in something that is not likely to play out.”
Tough words, certainly. And yet, the track record of many organizations with regard to recruiting and retaining talent bears him out, as the recent recession and its legacy of protracted unemployment painfully illuminates. While equating human capital management with managing a supply chain might seem dehumanizing, Cappelli says the traditional system of hiring and firing people based on the ups and downs of business is far worse. “In many cases, it actually makes more sense to retain people when prospects falter, so when things revive you can quickly meet demand,” he explains. “Otherwise, you’re consuming valuable time training new people.”
Not that he is in any way arguing for a bloated labor force. In Talent on Demand,
Cappelli espouses a strategy of asking questions about human capital requirements that borrows from the questions supply chain managers typically ask, such as “Do we have the right parts in stock?” or, “Do we know where to get these parts when we need them?” and, “Does it cost a lot of money to carry inventory?”
Asking such questions leads to simulations or scenarios that provide a more compelling way to assess uncertainty than the traditional static forecasting model. For example, take the question about inventory. With talent management, organizations will often say they have a “deep bench.” Yet a deep bench in a supply chain is a costly way of preparing for demand. “The same applies to traditional succession management—you’re paying people to essentially ‘sit on the shelf,’ ” says Capelli.
Instead of targeting a specific person for a particular job five years down the line, Cappelli recommends creating a diversified pool of talent. He borrows this concept from portfolio management theories, an approach whereby the risks of certain investments falling in value are, ideally, offset by different investments that will rise in value. “Rather than have each division in a decentralized organization predict the number of salespeople it will need and then run the risk of too many salespeople or too few, pool the divisions with respect to hiring so these variations are canceled out,” he explains. “You can then move people around to fill posts where needed.”
Cappelli has his supporters in the world of academia, on both sides of the pond. Anthony Hesketh, associate professor at Lancaster University’s School of Management in Lancaster, England, (and author, most recently, of Explaining the Performance of Human Resource Management) says Cappelli’s ideas about more flexible methods of talent employment and management were “ahead of its time.” Hesketh elaborates: “Peter pointed out that the old methods of talent forecasting were off, since nine times out of ten they were wrong anyway. . . . Why recruit and stockpile all this talent and then let them sit on the shelf, given the corollary expense? Why not hedge your bets by pooling a group of talented individuals with diverse skill sets, train and develop this talent, and then deploy them where you need them?”
If an organization ends up with fewer people than it requires, Hesketh says, “You can then buy that talent. It’s just a more flexible, variable method of talent management than the current model.” In Talent on Demand, this concept is referred to as the “make-versus-buy decision.
What About Outsourcing?
Cappelli is a fan of HR outsourcing, which neatly fits his “make or buy” theory, although he warns that relying too much on the services provided by others and less on an organization’s talent pool carries risk. “A move away from lifetime employment can be a good thing for some people,” he says. “You can still have people being hired fulltime, but there is value in temporary hires and especially in the use of outside specialist contractors.”
A specialist contractor can be brought in to fulfill a job for a period that changes with the organization’s needs, which is generally related to shifts in its business. He acknowledges that not everyone is comfortable accepting a talent-on-demand model, given its uncertainties of work and income, but others might like the control it provides over their schedules. Certainly, it would seem to be a better model than losing one’s fulltime job and going on the dole while awaiting the next fulltime job.
For companies, Cappelli says that the “make or buy” choice involves sifting through alternatives—should you develop talent from within your organization or hire from the outside? “If an organization is caught without the competencies required to address a spike in business, the solution is to grab a provider to do it for you,” he explains. “From a cost standpoint, this is a better tactic than spending to fund a ‘deep bench.’ If you’re falling short, yes this will cost you, but it is not a big deal by comparison.”
Cappelli’s colleague at The Wharton School, Matthew Bidwell, an assistant professor of management, says that leveraging the outsourcing marketplace, while retaining a pool of diversely talented people in-house, is a good idea—if managed carefully. “Using specialists for swing-demand and short-term projects makes enormous sense, but you don’t want to end up in a situation where your frontline managers are using them for everyday tasks because they can’t get the headcount they need to work effectively,” Bidwell notes.
For his part, Cappelli isn’t resting on his laurels. He’s already at work on his next book and is enjoying the publication of his latest (with Bill Novelli), Managing the Older Worker. In it, he confronts the practice of ageism within many organizations, by building a business case for older workers in the labor force. For example, he points to the growing practice within many companies of holding on to retirees and bringing them back for short-term assignments.
In some ways, it’s a logical sequel to Talent on Demand. Many retirees need money to augment unexpected declines in their retirement income, while a veritable horde of workers in their fifties and sixties have been given the heave-ho during the recession. If companies create pools of talent, those workers will be lining up at the diving board to jump in.
What Peter Cappelli contends that HR could—and should—learn from the procurement department.